The European Central Bank left its key interest rate unchanged on Thursday even though the economic recovery has slowed in the 17-country eurozone.
The currency bloc’s chief monetary authority left its benchmark rate at 0.25 per cent at a meeting at its headquarters in Frankfurt, Germany, following a surprise quarter-point cut last month.
Markets were waiting for a news conference by President Mario Draghi for any hints about the ECB’s future course. With interest rates near zero, the bank is considering other ways to support the recovery if it falters.
The refinancing rate determines what banks pay to borrow from the ECB and influences borrowing costs for businesses and consumers. In theory, a cut in the rate means lower market rates that allow businesses to borrow more easily so they can invest in new production and create jobs.
But some banks are unwilling to lend at those low rates because they’re worried about the economy and focused on fixing their own finances. That blunts the effect of the ECB’s low-rate policy.
Other ways to stimulate the economy include giving cheap, long term loans to banks, at the condition that the money is actually used for loans to businesses instead of hoarded in investments such as government bonds.
The ECB could also push the deposit rate it pays banks from zero into negative territory. That would in theory give banks an incentive to pull the money out of the central bank’s super-safe deposit facility and lend it.
A deposit rate cut, or a further cut in the refinancing rate to near zero or to zero, might not help growth directly. But more rate cuts could help by a different route, by lowering the euro’s exchange rate. Lower rates reduce investor demand for a currency by decreasing returns on fixed-income investments.
A lower euro would help countries in the eurozone export more by making their goods cheaper in other currencies.
In theory, ECB officials have said they could also start large-scale bond purchases with newly-created money, as the U.S. Federal Reserve has done. That could drive down longer-term interest rates. But the economy would have to be so slack that it is threatened with deflation, a chronic fall in prices that kills off consumer spending and business investment.
