European Central Bank holds interest rate at 0.25%

Many economists say that the ECB is now all but certain to take action at its March 6 meet

The European Central Bank on Thursday left its benchmark interest rate unchanged, choosing to wait for additional data before deciding whether to address evidence that the Euro zone is sliding into the dangerous economic condition known as deflation.

Mario Draghi, the central bank's president, acknowledged at a news conference that the 0.7 per cent inflation rate in January was lower than expected and said that it would remain low over the coming months but then gradually climb back to the bank's target of just below 2 per cent.

"We have to dispense with the question, 'Is there a deflation?' and the answer is, 'No,' " he said.

He added that a moderate economic recovery continued in the final quarter of 2013 and that interest rates would stay low "for an extended period of time." He reiterated that the bank was prepared to take decisive action if conditions warrant it.

Many economists said that the ECB was now all but certain to take action at its March 6 meeting.

The turmoil in emerging markets may have the potential to affect the European recovery, Draghi said, adding that the central bank was analysing whether the volatility was a temporary phenomenon or would persist for a long time.

The ECB, which sets monetary policy for the 18 nations that share the euro currency, is trying to restore growth in a region where more than 19 million people are officially listed as unemployed.

The bank held the benchmark interest rate steady despite a recent official report that showed that consumer prices rose at an annual rate of only 0.7 per cent in January, the fourth consecutive monthly reading below 1 per cent.

The ECB's target for an economically healthy inflation rate is just below 2 per cent. Economists say that the current low rate is indicative of an economy so sluggish that businesses and consumers see little reason to invest and spend.

Although Draghi has never said what he believes to be an unacceptably low figure for price increases, after October's 0.7 per cent inflation rate, in November the central bank cut its main rate by one-quarter point to a record 0.25 per cent.

Economists worry that deflation could saddle Europe with a host of new problems just as the economy is emerging from years of contraction and stagnation. Deflation has the potential to crimp growth and further weigh on employment, and - because it stresses borrowers, leading some to default on their loans because their houses or other assets are worth less than what they paid for them - could further weaken Europe's still-fragile financial sector.

The central bank's forecast is that the euro zone's economy will grow by 1.1 percent this year. And there have been some recent grounds for optimism, including strong readings of consumer and business sentiment, as well as purchasing manager surveys that show output picking up.

The E.C.B. on Thursday also left unchanged the deposit rate it pays commercial banks on money that they keep at the central bank. That rate remains at 0 percent. There had been speculation by some economists and analysts that the central bank might actually reduce that to a negative interest rate - essentially forcing banks to pay the E.C.B. to keep their money - as a way to induce banks to lend more to businesses and consumers, rather than parking their funds with the central bank.

In a departure from the norm, there had been no consensus among economists before Thursday's meeting of the E.C.B. Governing Council about which way the council was leaning.

The E.C.B. said last month that bank lending to euro zone companies fell 2.3 percent in December from a year earlier, while the broad money supply in the euro zone grew just 1 percent, well below the 4.5 percent that the central bank believes is consistent with its price stability goals.

©2014 The New York Times News Service