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ECB holds key rate steady at 0.05%

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Paris: The European Central Bank held its key interest rates unchanged, as expected, on Thursday, but is expected to prime the markets for more anti-deflation measures next year.

At its final policy meeting of this year, the ECB held its main “refinancing” rate steady at 0.05 percent, and its two other rates — the marginal lending and the deposit rates — at 0.30 percent and minus 0.20 percent respectively.

ECB President Mario Draghi was scheduled to explain the reasoning behind the decisions at his monthly news conference.

Given the alarming drop in eurozone inflation in recent months, pressure has increased on the ECB to undertake massive stimulus measures like central banks in Britain, Japan and the United States have done.

According to official data, inflation in the 18 countries that share the euro slowed to 0.3 percent in November from 0.4 percent the previous month, feeding fears of imminent deflation.

Falling prices may sound good for the consumer, but they can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.

The ECB is scheduled to publish its own latest updated inflation and growth forecasts and is worried that medium-term inflation expectations could become permanently de-anchored from its target of around 2.0 percent.

The ECB has already launched a multi-pronged offensive against deflation, cutting its interest rates to new all-time lows, making unprecedented amounts of cheap loans available to banks via its LTRO and TLTRO programmes, and unveiling asset purchase programmes (ABSs and covered bonds) to pump liquidity into the financial system.

But it has also hinted at more radical action in the form of quantitative easing (QE), a policy used by other central banks to stimulate their sluggish economies.QE is the large-scale purchase of government bonds and such a policy has many critics in Europe, not least the German central bank or Bundesbank, because it is felt that it takes the ECB outside its remit and is effectively a licence to print money to get governments out of debt.

Natixis economist Alan Lemangnen said he “did not expect the ECB to announce sovereign bonds purchases. But we expect the current easing package to be widened.”

Among the possible easing measures, there was a “high probability” that Draghi would announce more favourable conditions on the TLTRO programme, Lemangnen said.

And the current assets purchase programmes “should be widened,” the expert predicted.

Capital Economics economist Jonathan Loynes said Draghi might still surprise the markets with a full-blown quantitative easing programme.

“But recent comments from vice president Vitor Constancio suggest that the governing council wants more time to assess the impact of existing policies and a delay until the next policy meeting, on January 22, is perhaps more likely,” Loynes said.

Despite recent tentative signs of a small improvement in some activity, the general weakness of the economy would be reflected in downward revisions to the ECB staff projections for both growth and inflation, Loynes said.

“If it does not come today, we expect a programme of sovereign debt purchases to be launched in January. But whether it will be big and effective enough to revive the eurozone economy is another matter,” the expert said.

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