* ECB keeps main refinancing rate at record low of 0.25 pct
* Forecasts inflation below 2.0 percent target through 2016
* Decides not to inject further liquidity into financial
* Deposit rate remains at zero
(Adds Draghi quotes, market and analyst reaction)
By Leika Kihara
FRANKFURT, March 6 The European Central Bank
left interest rates on hold and unveiled no other measures to
bolster a fragile euro zone recovery on Thursday, despite
forecasting low inflation for years to come.
ECB President Mario Draghi also described as "relatively
limited" the benefits of one technical option for loosening
lending conditions, suggesting the bank will either do nothing
or else take bold policy action should the outlook deteriorate.
The ECB left its main interest rate at 0.25 percent, a move
generally expected by markets, and held the deposit rate it pays
banks for holding their money overnight at zero.
Draghi said the latest economic information suggested
recovery was on track and needed no extra push for now.
"We saw our (economic) baseline by and large confirmed," he
told a news conference after what he described as a "broad
discussion" on interest rates, and other policy instruments.
"The news that has come out since the last monetary policy
meeting is also, I would say, by and large on the positive
The euro jumped against the dollar to its highest since
December and to a peak against the yen not seen since Jan. 23
after the ECB signalled no need for new economic stimulus.
Inflation has been in what Draghi calls the "danger zone"
below 1 percent for five months now and was running at 0.8
percent at the last count.
The lack of action was significant, since last month Draghi
had signalled that by the March policy meeting the ECB would
have enough information to judge the need for fresh stimulus.
An ECB source had predicted before the meeting the ECB would
agree to stop operations to soak up money spent on Greek and
other countries' bonds at the height of the euro crisis. But the
ECB held off this option and Draghi played down the impact it
RBS economist Richard Barwell said ending the drain
operations would have achieved little.
"So the message is 'we'll either do something meaningful, or
nothing at all'," Barwell said. "Token gestures are off the
Like the Bank of Japan, which meets to set policy next week,
the ECB is running out of room to cut interest rates, putting
the onus on alternative policy measures.
ECB policymaker Ewald Nowotny told Reuters last month that
he and his colleagues were nearing unanimity on the option to
end the so-called sterilisation operations.
The resultant release of around 175 billion euros ($240
billion) would have roughly doubled the amount of excess
liquidity in the financial system, helping to bring down
interbank lending rates.
The move would also have marked a big philosophical shift
and a step towards U.S.-style quantitative easing
However, Draghi said there was no sign of back-door monetary
tightening via rising money-market rates and therefore no need
to act, for now at least.
"The benefits of such sterilisation are relatively limited
given the short maturity of the bonds currently present in the
SMP (sovereign bond) portfolio," he said.
"So the injection of the liquidity would really last only a
relatively short time, less than a year for sure," he added.
New forecasts from ECB staff put inflation at 1.0 percent
this year, 1.3 percent in 2015 and 1.5 percent in 2016 - below
its target of close to 2 percent all the way through the
"Annual HICP (EU harmonised) inflation rates are expected to
remain at around current levels in the coming months," Draghi
said. "Thereafter, inflation rates should gradually increase and
reach levels closer to 2 percent."
The forecasts presume an unchanged exchange rate and falling
Draghi rejected comparisons with Japan's experience of
deflation, which became so entrenched that companies and
households put off spending on expectations of lower prices
ahead, leading to two decades of economic stagnation.
ECB policymakers have insisted that so far there is no sign
of euro zone citizens deferring spending plans.
The International Monetary Fund believes more needs to be
done, however. Reza Moghadam, head of the IMF's European
Department, said in a blog on Wednesday that the ECB should cut
interest rates and pump out more money, perhaps through QE.
"The analysis that we do at the present time ... diverges
from what the IMF is saying," Draghi said.
Turning to tensions in Ukraine, he said trade links were
insufficient to risk to suggest major risks for the euro zone.
But he described the growth impact on Russia as "severe",
and said "the geopolitical risks in the area could quickly
become substantial and generate developments that are
unforeseeable and potentially of great consequence."
($1 = 0.7278 euros)
(Writing by Paul Carrel/Mike Peacock Editing by Jeremy Gaunt,