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European Central Bank Leaves Interest Rate Unchanged Central Bank Chief Says Euro Rise Is Sign of Confidence
(about 3 hours later)
FRANKFURT — The European Central Bank left its main interest rate unchanged at its current record low Thursday, as expected, amid signs that the euro zone economy could be crawling out of recession. FRANKFURT — The recent rise of the euro is an expression of confidence in the euro zone, the president of the European Central Bank, Mario Draghi, said Thursday, reinforcing the bank’s view that the 17 nations that share the currency will emerge from recession later this year.
The E.C.B. left its main rate at 0.75 percent, where it has been since July. Recent surveys of business sentiment have raised expectations that the euro zone could be slowly recovering, although there is also concern that the rising value of the euro against the dollar could undercut the fragile gains. In recent weeks, the euro has risen substantially against the dollar, to the highest levels in a year. On Thursday, it had dropped to $1.33 from nearly $1.36; back in July, it was trading at just above $1.21. European stock markets and indexes on Wall Street also fell after Mr. Draghi’s remarks.
Recent data have supported the E.C.B. view that the euro zone will emerge from recession later this year. New orders to German industry rose 0.8 percent in the fourth quarter of 2012. Recent data and surveys of business sentiment have raised expectations that the euro zone could be slowly recovering, although there is also concern that the rising value of the euro against the dollar could undercut the fragile gains by making euro zone products more expensive for foreign buyers.
But the recovery is threatened by the rising value of the common currency, which could hurt exports by making euro zone products more expensive for foreign buyers. In recent weeks, the euro has risen substantially against the dollar, to the highest levels in a year. The E.C.B. left its main rate at 0.75 percent, as expected, where it has been since July. In a press conference following the interest rate announcement in Frankfurt, Mr. Draghi took the positive road.
Few analysts had expected the E.C.B. to shift its monetary policy Thursday. Some predict that the benchmark rate could stay at its present level for an extended period as the euro zone slowly returns to growth. “The appreciation is, in a sense, a sign of return of confidence in the euro,” he said.
Mr. Draghi said the E.C.B. would monitor the impact of a strengthening euro on the currency bloc’s economy and on inflation, but he said that bringing down the euro’s value was “not a policy target,” adding that the exchange rate was close to its long-term average.
Few analysts had expected the E.C.B. to shift its monetary policy at this meeting. Some predict that the benchmark rate could stay at its present level for an extended period as the euro zone slowly returns to growth.
“We expect interest rates to be on hold at 0.75 percent until 2017 and only significant changes in the economic environment would trigger a change one way or the other,” Marie Diron, senior economic adviser to the consulting firm Ernst & Young, said in an e-mail before the decision.“We expect interest rates to be on hold at 0.75 percent until 2017 and only significant changes in the economic environment would trigger a change one way or the other,” Marie Diron, senior economic adviser to the consulting firm Ernst & Young, said in an e-mail before the decision.
Although there was no change in rates, the E.C.B. news conference later Thursday afternoon could prove eventful. Mario Draghi, the E.C.B. president, is likely to face questions about whether the bank will respond to the appreciation of the euro, which was up again midday Thursday, to nearly $1.36. Back in July it was trading just above $1.21. Mr. Draghi also denied suggestions that he had been lax in his oversight of the scandal-hit Monte dei Paschi. The bank, one of Italy’s largest, has required a €3.9 billion bailout by the Italian government. Mr. Draghi was governor of the Bank of Italy, responsible for bank supervision, during the period when Monte dei Paschi was getting in trouble several years ago.
A stronger euro means that products ranging from cars to wine become more expensive abroad, putting European producers at a disadvantage to foreign competitors. In his first public comments on the crisis, Mr. Draghi said that the Bank of Italy had “done everything it should and appropriately and on time.” He said much of the criticism of the central bank was due to “noise” ahead of national elections this month.
Analysts do not expect Mr. Draghi to take steps to devalue the euro, but he could remind his counterparts at other central banks outside the euro zone of their promise not to start a currency war. If the value of one currency goes up, another currency must come down, making exchange-rate manipulation by central banks a zero-sum game that economists believe is counterproductive.
Mr. Draghi is also likely to face numerous questions about problems at the Italian bank Monte dei Paschi di Siena, which has required a €3.9 billion bailout by the Italian government. Mr. Draghi was governor of the Bank of Italy, responsible for bank supervision, during the period when Monte dei Paschi was getting in trouble several years ago.
Mr. Draghi’s supporters have pointed out that there was a deliberate attempt by that bank’s previous management to conceal the extent of their losses, and that the Bank of Italy did not have the authority to prevent Monte dei Paschi managers from making foolish decisions. Part of the bank’s problems stem from its acquisition of regional bank Antonveneta in 2008 for €9 billion, a price considered much too high even at the time.Mr. Draghi’s supporters have pointed out that there was a deliberate attempt by that bank’s previous management to conceal the extent of their losses, and that the Bank of Italy did not have the authority to prevent Monte dei Paschi managers from making foolish decisions. Part of the bank’s problems stem from its acquisition of regional bank Antonveneta in 2008 for €9 billion, a price considered much too high even at the time.
But at the very least, the case of Monte dei Paschi has illustrated the limits of bank supervision, and called into question whether the E.C.B. will be able to do a better job than national supervisors when it begins assuming supreme regulatory authority over banks in the course of this year.But at the very least, the case of Monte dei Paschi has illustrated the limits of bank supervision, and called into question whether the E.C.B. will be able to do a better job than national supervisors when it begins assuming supreme regulatory authority over banks in the course of this year.
The problems at Monti dei Paschi bank have also been exploited by Silvio Berlusconi, the former prime minister of Italy, as he attempts a comeback in elections at the end of this month. Mr. Berlusconi has run a populist campaign promising to undo some of the economic changes made by his successor, Mario Monti.The problems at Monti dei Paschi bank have also been exploited by Silvio Berlusconi, the former prime minister of Italy, as he attempts a comeback in elections at the end of this month. Mr. Berlusconi has run a populist campaign promising to undo some of the economic changes made by his successor, Mario Monti.
Italian politics aside, international investors are concerned about the new jitters the debacle could create in euro zone bond markets, which have calmed considerably lately.Italian politics aside, international investors are concerned about the new jitters the debacle could create in euro zone bond markets, which have calmed considerably lately.
“A government may well be formed on a platform that rejects some, if not most, of the Monti government’s fiscal reforms,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients Wednesday. “As uncertainty grows, the bond markets are becoming increasingly unsettled.”“A government may well be formed on a platform that rejects some, if not most, of the Monti government’s fiscal reforms,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients Wednesday. “As uncertainty grows, the bond markets are becoming increasingly unsettled.”
Despite persistent questioning, Mr. Draghi resolutely declined to offer any information about the central bank’s role, in any, in helping Ireland to reduce its interest payments through a restructuring of the debt of the former Anglo Irish Bank.
The Irish Parliament approved legislation early Thursday to recapitalize the bank, after negotiations with the European Central Bank over swapping so-called promissory notes, which were used to bail out the Irish lender in 2009, for long-term government bonds.
Mr. Draghi said the E.C.B. governing council merely “took note” of the Irish action. But he refused to provide any details.
The E.C.B. president may have wanted to avoid any impression that the central bank was giving a financial break to the Irish government. The E.C.B.’s charter prohibits it from financing euro zone governments.
Mr. Draghi did, however, applaud efforts by the Irish government to restore growth and get government finances under control. “All in all the outlook is very positive,” he said.
Mark Scott contributed reporting from London.