Eurozone improvement means ECB set to leave rates

Europe’s brighter economic outlook means the European Central Bank is likely to leave its key interest rate unchanged at a record low of 0.5 per cent.

The bank’s 23-member rate-setting council meets Thursday at its headquarters in Frankfurt, Germany, to decide monetary policy for the 17 European Union countries that use the euro.

Economists say President Mario Draghi will likely repeat the guidance made back in July that interest rates will stay at the same level or lower “for an extended period” while the economy recovers. Mr. Draghi is hoping that by giving clear assurance rates won’t go up, the bank can boost confidence in the economy and help keep market interest rates down.

Jonathan Loynes, chief European economist at Capital Economics, said Draghi was unlikely to add more clarity to the low-rate pledge by linking it to a numerical target. The U.S. Federal Reserve, for instance, has said rates will remain low at least until unemployment falls to 6.5 per cent.

“While the recent improvement in the euro zone’s economic prospects suggests that a further cut in interest rates is unlikely in the near future, President Draghi will no doubt repeat the relatively vague pledge to keep rates at or below present levels ‘for an extended period of time.’”

According to the latest figures, the euro zone economy grew a modest 0.3 per cent in the second quarter, after 18 months of recession. Indicators of future growth, such as surveys of purchasing managers, suggest euro zone could grow modestly.

Economists say the bank may even raise its growth forecast this year, from the current negative 0.6 per cent.

Despite the improved euro zone picture, economists say growth will have to be stronger in order to reduce the unemployment rate of 12.1 per cent. ECB statistics show that demand for credit from businesses remains weak, even though rates are very low. That suggests the outlook for profit remains too weak for them to risk more borrowing to expand and create more jobs.

One problem that could hold back growth is strained finances at banks, restricting their lending particularly in countries hardest hit by the euro zone’s financial difficulties. The ECB is readying a check of banks’ finances ahead of taking over as the EU-wide banking supervisor next year.