ECB leaves rates on hold despite inflation worries

By JUERGEN BAETZ

President of the European Central Bank Mario Draghi attends a press conference after a Eurogroup meeting in Athens, Tuesday, April The European Central Bank left its main interest rate unchanged Thursday despite evidence that the economy of the 18-country eurozone is weak, with inflation continuing to fall and unemployment stuck near a record high. The ECB's decision to leave the rate at a record-low 0.25 percent is certain to prompt questions about whether it might soon resort to less conventional measures to boost the economy, such as a new round of cheap loans to banks or large-scale purchases of financial assets, as the U.S. Federal Reserve has done. President Mario Draghi is set to discuss the ECB governing council's policy decision later Thursday, and investors will be watching for any hints of future action. Data released on Monday showed the annual inflation rate across the eurozone dropped to 0.5 percent in March — down from 0.7 percent in February. The decline — the third in as many months — underlined concerns that consumer prices could start to fall outright, starting a so-called deflation. That risks creating a situation in which consumers and businesses put off purchases in hopes of better deals down the line and companies cut prices to entice buyers. Such a downward spiral chokes off economic growth and can be difficult to get out of — Japan was stuck in deflation for two decades. The ECB has said the eurozone is experiencing a "protracted period of low inflation" but dismisses fears of an outright deflation. Unemployment, meanwhile, remains stuck near a record-high of around 12 percent following years of economic and financial upheaval. In the countries hardest-hit by the crisis like Greece and Spain, more than one in four people are still jobless. Besides having a social cost, high unemployment also weighs on consumption and the wider economy. The EU predicts the eurozone will grow 1.1 percent this year. While that would be the bloc's best performance since 2011, it would still pale in comparison to the U.S. economy, which is expected to grow around 3 percent. This week's new dip in inflation came at a time when the euro has been buoyant in foreign exchange markets. But a higher currency can push inflation further down in two ways: It can make imports cheaper and weigh on economic activity by making exports more expensive on international markets. The prospect of a looming deflation, meanwhile, is especially worrisome for those eurozone nations already unable to support growth because of their overly high debt burden. That's because when prices fall, it becomes harder to service debts, which are fixed in nominal terms. Among the possibilities the ECB might be considering in the near future, analysts say, might be large-scale purchases of financial assets such as government bonds with newly created money, as the U.S. Federal Reserve has done. That would increase the amount of money in the economy and aim to lower market interest rates and stoke inflation. But such a move faces legal, political and technical obstacles. Besides offering a new round of cheap loans to banks, the ECB could also trim its deposit rate below zero, effectively penalizing banks for holding money at the ECB instead of lending it out in the economy.

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