* ECB holds rates at 0.75 pct, as expected
* Rate cut not discussed, unlike last month
* Draghi says recovery to take hold later in 2013
* Signs of stabilisation and substantial market improvement
By Eva Kuehnen
FRANKFURT, Jan 10 The euro zone economy will
recover later in 2013 and there are already some signs of
stabilisation, the European Central Bank said on Thursday after
it unanimously held interest rates at a record low.
The ECB left rates at 0.75 percent, following fledgling
signs of life in the euro zone economy and with inflation still
above target, and its president struck a more optimistic tone.
"The economic weakness in the euro area is expected to
extend into 2013," Mario Draghi told a news conference. "Later
in 2013, economic activity should gradually recover."
Last month, Draghi said there was "a wide discussion" on
reducing rates, a comment that fed expectations a cut would soon
On Thursday, the decision to keep policy on hold was
unanimous, Draghi said, because some indicators had begun to
stabilise, "albeit at low levels", while financial market
confidence had improved significantly.
The euro climbed to a one-week high against the U.S.
dollar, safe haven German Bund futures fell and European stocks
rallied in response to the unanimous view that looser policy was
"A rate cut this year seems more and more unlikely, unless
the economic recovery disappoints in strength or timing," said
Christian Schulz, economist at Berenberg Bank.
A Reuters poll published on Monday had pointed to the ECB
keeping rates on hold, though the economists surveyed were split
on the chances of a cut in the next few months.
Draghi remained cautious, saying the ECB was not thinking
about an exit from its crisis policy measures.
"The risks surrounding the economic outlook ... remain on
the downside," he said. "They are mainly related to slow
implementation of structural reforms in the euro area,
geopolitical issues and imbalances in major industrialized
National government policies to reform and improve
competitiveness remained of paramount importance, he said.
Borrowing costs of euro zone countries at the sharp end of
the bloc's debt crisis have tumbled sharply since Draghi pledged
last year to do whatever it took to shore up the currency area,
by buying government bonds in potentially unlimited amounts.
So far, that effect has endured without the ECB having to
put its money where its mouth is.
"Bond yields and country CDS (bond insurance costs) are much
lower, significantly lower. Stock markets have increased.
Volatility is at a historical minimum," Draghi said, rattling
off a list of factors that led the ECB to hold rates this month.
"We spoke a lot about contagion when things go poorly, but I
believe there is a positive contagion when things go well, and I
think that's also what is in play now," he added.
Inflation has eased more slowly than the ECB initially
expected and as long as it misses the target -- it has been
above 2 percent for more than 2 years -- a rate cut could be
difficult to justify.
"Inflation rates are expected to decline further to below 2
percent this year," Draghi said.
Howard Archer, economist at Global Insight, said "the ECB
appeared to close the door to an interest rate cut in the near
term" but that a cut further out was still possible, predicting
growth would be harder to foster than the central bank expects
and unemployment would continue to rise.
"This is likely to put the ECB under increasing pressure to
take interest rates lower," Archer said. "We suspect that there
will be periodic flare ups in euro zone sovereign debt tensions
as Spain and Italy continue to struggle markedly."
Another cut of the main refinancing rate would have raised
the question of whether the ECB would also lower its deposit
rate -- already at zero -- by the same amount, which would push
it into negative territory, essentially charging a fee for banks
to park money with it for the first time.
Even though Draghi has said the bank was "operationally
ready" for such a step, it has grown increasingly wary of the
idea, a source with knowledge of the ECB's thinking said.
Negative deposit rates could deal a hefty blow to money
market funds, which have already seen cash outflows since the
ECB cut the deposit rate to zero in July. The rate is a peg for
short-dated money market rates and it is already almost
impossible for funds to generate a return for their investors.