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ECB Interest Rates Remain at 0.25%

James Boston
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The European Central Bank (ECB) has just announced that it will hold interest rates steady for at least one more month. The key Refi Rate will remain at 0.25%, a level it has been at since November last year.

The ECB’s mandate is officially price stability, but in controlling monetary policy for the entire Eurozone it also hold a de facto responsibility to encourage GDP growth. Therefore the ECB is in a bind, there is a need to stimulate many of the flagging Euro economies without overheating the performing ones. More pressing however is the need to encourage price inflation upward towards the Bank’s target of 2%. Despite a rare uptick in the Eurozone CPI late last month, the single currency bloc remains hazardously close to entering a deflationary spiral.

Markets had been very nervous ahead of this crucial meeting of the Governing Council of the ECB. Not without justification, in extreme cases deflation can grip an economy for a decade or more, look at Japan. There has been growing concerns that the ECB is not doing enough to stave off deflation.

It may be however that the ECB doesn’t see further monetary policy loosening as helping the situation. A series of interest rate cuts over the course of the past 2 years has surprisingly been met with a falling inflation rate. The ECB press conference at 1:30 GMT today will afford Mario Draghi the opportunity to outline the Central Bank’s plans for addressing the serious inflation issue.

The Euro has finally woken up, after spending most of the last 24 hours bouncing around in a 20 point range, the decision by the ECB not to cut rates has given the single currency the impetus it needed to break out on the top side. The run up is likely to be limited however, short term trading is already giving way to longer term fundamental concerns.

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