ECB leaves rates at record low as Europe struggles

Patrick Sinkel/dapd

FRANKFURT, Germany The European Central Bank has left its benchmark interest rate unchanged at a record low of 0.75 percent even though the economy in the euro area remains stuck in recession.

Markets were waiting to hear ECB head Mario Draghi talk about his outlook for the economy at a news conference later Thursday.

The bank held off cutting rates after recent economic survey data supported its position that the economy in the 17 European Union member countries that use the euro will recover gradually this year. The bank sets monetary policy for the eurozone and its 333 million people.

The ECB last month slashed its economic forecast for this year from 0.5 percent growth to a decline of 0.3 percent, with growth resuming only later in the year. Some indicators of business optimism, such as eurozone surveys of purchasing managers and Germany's Ifo institute survey of 7,000 business executives, have risen recently.

Nonetheless, survey data remain at levels indicating the eurozone is still in recession -- just not shrinking as fast. Unemployment has hit 11.8 percent, the highest since the euro was introduced in 1999. Greece, which is cutting spending to try to reduce huge levels of debt, reported a jobless rate of 26.8 percent on Thursday.

There is widespread doubt among economists about how much good an additional cut would do. The ECB refinancing rate, which sets the cost of ECB loans to banks, is intended to influence what banks charge others. Lower rates can spur an economy by encouraging borrowing, investment and spending. Yet the current low ECB rates are sometimes not being passed on by banks.

Business borrowing costs remain elevated in some places because some banks are still recovering from losses on government bonds and other investments during the eurozone's market turmoil, and because of troubled government finances in indebted countries.

An additional problem is that businesses and consumers don't want to take on the risk of more debt given the rough economy.

The ECB has helped calm the eurozone's financial turmoil over too much government debt in some countries by using methods other than a rate cut. It did this by offering to buy the bonds of heavily indebted countries such as Spain and Italy, as long as they agree to take steps to reduce their deficits. That had the effect of lowering their borrowing costs on bond markets by reducing the fear they might not be able to handle their debts -- even though no country has asked for the help yet.

The interest rate -- or yield -- on Spain's 10-year government bond fell to 4.94 percent in bond market trading Thursday. That is down from 7.6 percent in July, before the ECB announced the bond purchase offer. Bond yields fall as prices rise, since price and yield move in opposite directions. Higher demand for the bonds, and consequently higher prices and lower yields, indicate more confidence the bondholder will be paid back.

With markets calmer, the focus has turned to worries about growth. Over the long term, making the economy bigger is the most reliable way to reduce troublesome levels of debt. Some economists say the ECB is likely to maintain the position that it has done its job and now it's up to governments to cut deficits and improve growth by reducing regulation.

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