* ECB keeps interest rates at 0.75 pct
* Draghi signals rate reduction in the pipeline
* Deploys verbal signal favoured by his predecessor
* Says ECB ready to act, policy discussion "extensive"
By Sakari Suoninen
FRANKFURT, April 4 The European Central Bank
expects a gradual economic recovery later this year but will
monitor incoming data very closely and is ready to cut interest
rates if necessary, its president said on Thursday.
Addressing a news conference after the ECB held rates at a
record low 0.75 percent, the highest level among the world's
major central banks, Mario Draghi said discussion at the monthly
meeting had been extensive and the consensus was to hold fire.
But he added that the ECB stood "ready to act" because there
was no certainty that the euro zone economy would pick up.
"In the coming weeks, we will monitor very closely all the
incoming information on economic and monetary developments, and
assess the impact on the outlook for price stability," he said.
Draghi's predecessor, Jean-Claude Trichet, used a stock of
coded phrases to signal future policy actions something his
successor has not previously indulged in. One of those phrases
was "monitor very closely" although in the Frenchman's era it
more often presaged an interest rate rise two months' hence.
German government bond and euro zone interest rate futures
extended gains with market participants saying Draghi's comments
laid the ground for a rate cut in coming months.
"In a nutshell, a rate cut or additional non-standard
measures cannot be ruled out in May," said Annalisa Piazza at
The ECB is mandated to deliver inflation just below 2
percent. In March, it fell to 1.7 percent.
A survey released earlier on Thursday showed the euro zone's
economic decline dragged on unabated in March, marked by a huge
drop in French business activity that outstripped even the
downturns in Spain and Italy.
"Weak economic activity has extended into the early part of
the year and a gradual recovery is projected for the second half
of the year subject to downside risks," Draghi said.
As the world recovers from the financial crisis, the ECB has
lent less support to the economy than its peers in Japan, the
United States and Britain, which have launched massive asset
purchase programmes with new money and cut rates closer to zero.
ECLIPSED BY JAPAN
The Bank of Japan went a step further on Thursday. Its new
governor, Haruhiko Kuroda, shocked markets with a radical
overhaul of its policymaking, adopting a new balance sheet
target and pledging to double its government bond holdings in
two years as it seeks to end nearly two decades of deflation.
Japan is intent on pushing inflation higher, lifting the
country out of decades of deflation and minimal growth. The
scope of the changes drove the yen lower and knocked the 10-year
bond yield to its lowest in a decade.
A number of countries, particularly emerging economies, have
already complained about policies which drive currencies lower,
threatening a destabilising race to the bottom.
The ECB is unlikely to pursue a similar path, although a
stronger euro is the last thing a recession-mired economy
"Our exchange rate is not a policy target. Our exchange rate
is important for growth and price stability," Draghi said.
German Finance Minister Wolfgang Schaeuble said Tokyo could
not count on central bank actions alone to boost its economy and
must carry through with structural reforms.
Earlier this week, ECB Executive Board member Benoit Coeure
warned against countries directly pursuing competitive
devaluations, especially if other central banks had limited room
After early signs of stabilisation in the euro zone economy
at the start of the year, March marked a set back as Cyprus
narrowly escaped a financial meltdown by securing a last-minute
bailout and Italy struggled to end a post-election deadlock.
Euro zone economic sentiment fell after four months of gains
and surveys showed manufacturing across the bloc fell deeper
The ECB's main worry is that its low rates are not reaching
households and firms in the euro zone periphery, mainly because
banks' funding costs in crisis stricken countries are higher
than those in the core countries, pushing up loan costs.
This affects small and medium-sized enterprises (SMEs) in
particular as they have few alternatives to bank funding.
Draghi stressed that the Cyprus bailout -- involving losses
imposed on richer bank depositors -- was not a template for
future rescues as others have suggested.