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European Central Bank Holds Steady on Rates European Central Bank Holds Steady on Rates
(about 2 hours later)
PARIS — The European Central Bank left its benchmark interest rate unchanged at a record low Wednesday, but it was likely to be keeping a wary eye on political turmoil in the United States. PARIS — The European Central Bank left its benchmark interest rate unchanged at a record low on Wednesday, but indicated it was ready to take steps if needed to protect the euro zone from political turmoil in the United States.
Meeting in Paris, the E.C.B. governing council kept its main interest rate at 0.5 percent, where it has been since May. “The U.S. budget shutdown is a risk if protracted,” Mario Draghi, the central bank president, said at a news conference. But he added that he did not expect the shutdown to last a long time.
In his news conference, the E.C.B. president, Mario Draghi, said the central bank would continue holding rates down, citing continued low inflation. But he indicated that the governing council remained divided on whether a further rate cut is warranted. Mr. Draghi deflected a question about what would happen if the United States defaulted on its debt because of the deadlock in Washington. He emphasized, though, that the European Central Bank was poised to intervene if needed.
“We have a vast array of instruments,” Mr. Draghi said. “And we exclude no option.”
But no immediate moves were announced. Meeting in Paris, the central bank’s governing council kept its main interest rate at 0.5 percent, where it has been since May.
In his news conference, Mr. Draghi repeated his assurance that the central bank would continue holding rates down, citing continued low inflation. He said the governing council had discussed a rate cut but remained divided on whether one was warranted.
Although the euro common currency is no longer under siege, tension in the euro zone has risen in recent weeks. There had been questions about the survival of the Italian government before Wednesday, when the opposition leader Silvio Berlusconi said he would support the government of Prime Minister Enrico Letta in a vote of confidence.Although the euro common currency is no longer under siege, tension in the euro zone has risen in recent weeks. There had been questions about the survival of the Italian government before Wednesday, when the opposition leader Silvio Berlusconi said he would support the government of Prime Minister Enrico Letta in a vote of confidence.
But the partial shutdown of the American government, depending on how long it continues, could undercut demand from the euro zone’s most important trading partner. Moreover, the political impasse in Washington raises the risk that the United States will hit the debt ceiling and begin defaulting on its debt. Analysts agree a default would be catastrophic for the world economy. Asked about Italy, Mr. Draghi said the restrained reaction of financial markets to recent events in Rome showed that the euro zone had become more resilient. While political instability can hurt growth in countries where it is taking place, he said, “it doesn’t really hurt the euro zone as it used to do a few years ago.”
Mr. Draghi said that a “protracted” government shutdown in the United States could be a risk for the euro zone and the world economy. But he added that he did not expect the shutdown to last a long time. And he deflected a question about what would happen if the United States defaults on its debt because of the deadlock in Washington. But the partial shutdown of the American government, depending on how long it continues, could undercut demand from the United States, the euro zone’s most important trading partner. Moreover, the political impasse in Washington raises the risk that the United States will hit the debt ceiling and begin defaulting on its debt. Analysts agree a default would be catastrophic for the world economy.
The euro zone has emerged from a recession that lasted a year and a half, but it is a very weak recovery that could easily be derailed by an external shock. Europe has also been affected in recent months by expectations that the Federal Reserve in Washington would soon begin tapering off its economic stimulus — a move that, when it comes, is likely to push up market interest rates at a time when many European countries are already suffering from severe shortages of credit. The euro zone has emerged from a recession that lasted a year and a half, but it is a feeble recovery that could easily be derailed by an external shock. “We view this recovery as weak, as fragile, as uneven,” Mr. Draghi said.
Last week, Mr. Draghi said the E.C.B. would consider another installment of unlimited three-year loans to banks at the rock-bottom official interest rate. The low-cost central bank loans are the closest thing that the E.C.B. has to the “quantitative easing” employed by the Fed and it helps make sure that banks have plenty of cash. On Wednesday, though, he declined to be specific about when such a move might be coming. Europe has also been affected in recent months by expectations that the Federal Reserve in Washington would soon begin reducing its economic stimulus program — a move that, when it comes, is likely to push up market interest rates at a time when many European countries are already experiencing severe shortages of credit.
A government shutdown in the U.S. affects Europe because it unsettles financial markets, and because it reduces demand in the American market that is crucial for European exports — everything from Italian Ferraris to French cosmetics. Last week, Mr. Draghi said the European Central Bank would consider a fresh installment of unlimited three-year loans to banks at the rock-bottom official interest rate. The low-cost loans are the closest thing that the European Central Bank has to the “quantitative easing” employed by the Fed, and it helps make sure that banks have plenty of cash. On Wednesday, though, Mr. Draghi declined to be specific about when such a move might be coming.
“While the direct economic damage will probably be limited if government offices will be allowed to resume business after a couple of days, the political standoff will take its toll on sentiment,” Asoka Wöhrmann, co-chief investment officer of Deutsche Asset & Wealth Management in Frankfurt, said in an e-mail. “It is a bad harbinger for the upcoming — and potentially more serious — debt ceiling decision” in Washington. A government shutdown in the United States affects Europe because it unsettles financial markets, and because it reduces demand in the American market that is crucial for European exports — everything from Italian Ferraris to French cosmetics.
In addition, the shutdown could weaken the dollar. That tends to hurt European exporters because their products become more expensive in dollar terms and have a more difficult time competing in the United States or other foreign markets. “While the direct economic damage will probably be limited if government offices will be allowed to resume business after a couple of days, the political standoff will take its toll on sentiment,” Asoka Wöhrmann, co-chief investment officer of Deutsche Asset and Wealth Management in Frankfurt, said in an e-mail. “It is a bad harbinger for the upcoming — and potentially more serious — debt ceiling decision” in Washington.
There has been speculation that if the E.C.B. issues another round of three-year loans, the money would come with strings attached to ensure that banks lend it to businesses and consumers. In addition, the shutdown could weaken the dollar. That tends to hurt European exporters because their products become more expensive in dollar terms and have a more difficult time competing in the United States or other foreign markets. On Wednesday, prompted in part by Mr. Draghi’s resolve to keep rates low, the euro rallied to its highest level against the dollar since February, reaching a peak of $1.3606.
In the past, many banks hoarded their cheap E.C.B. cash or used it to buy government bonds and profit from the difference in interest rates. That practice helped governments in Italy and Spain to borrow at lower rates, but did little to help ease a severe credit crunch. There has been speculation that if the European Central Bank issues another round of three-year loans, the money would come with strings attached to ensure that banks lend it to businesses and consumers. Mr. Draghi would not confirm whether that would be so.
Jens Weidmann, president of the German Bundesbank and a member of the E.C.B. governing council, indicated this week that risk in the euro zone had risen because weak banks loaded up on government bonds. In the past, many banks hoarded their cheap central bank loans or used the cash to buy government bonds and profit from the difference in interest rates. That practice helped governments in Italy and Spain to borrow at lower rates, but did little to help ease a severe credit crunch.
“The more vulnerable banks are, the more they expose themselves to sovereign debt,” Mr. Weidmann wrote in The Financial Times. His remarks suggested he would push for restrictions on banks’ use of E.C.B. cash to buy government bonds. Jens Weidmann, president of the German Bundesbank and a member of the European Central Bank’s governing council, indicated this week that risk in the euro zone had risen because weak banks had loaded up on government bonds.
The E.C.B. has plenty of room to maneuver on monetary policy. Annual inflation in the euro zone fell to 1.1 percent in September, its lowest level in three and a half years and well below the E.C.B. target of about 2 percent. “The more vulnerable banks are, the more they expose themselves to sovereign debt,” Mr. Weidmann wrote in The Financial Times. His remarks suggested he would push for restrictions on banks’ use of central bank loans to buy government bonds.
The E.C.B. is sworn to defend price stability above all else, and in theory should be considering ways to increase inflation slightly. There remains a risk, however slight, that the euro zone could suffer deflation, a broad decline in prices that undercuts corporate profits and investment and is associated with economic depression. Deflation can be more destructive than inflation, because it is very hard to reverse. The European Central Bank has plenty of room to maneuver on monetary policy. Annual inflation in the euro zone fell to 1.1 percent in September, its lowest level in three and a half years and well below the bank’s target of about 2 percent.
The central bank is sworn to defend price stability above all else, and in theory it should be considering ways to increase inflation slightly. There remains a risk, however slight, that the euro zone could experience deflation, a broad decline in prices that undercuts corporate profits and investment and is associated with economic depression. Deflation can be more destructive than inflation, because it is very hard to reverse.
Mr. Draghi said inflation was in line with expectations and gave no indication the central bank was pondering measures to push inflation higher. “Inflation expectations for the euro area remain firmly anchored,” he said.

Jack Ewing reported from Frankfurt.

Jack Ewing reported from Frankfurt.