The European Central Bank left its record low interest rate unchanged for the third straight month as it waits to see the impact of its record liquidity injection, and as inflation concerns return. The Governing Council led by ECB President Mario Draghi decided to maintain the main refi rate at 1 percent following its meeting in Frankfurt. The decision was in line with economists' expectations. The rate on the marginal lending facility was held at 1.75 percent, while the deposit facility rate was kept at 0.25 percent. The central bank has never cut the rate below 1 percent. Reversing the two hikes undertaken last year under its former chief Jean-Claude Trichet, the bank had reduced the rate in November and December. Amid signs of stabilization in the economy, stubbornly high inflation and the prospect of some respite from the debt crisis, an additional rate cut in the coming months is highly unlikely, ING Bank economist Carsten Brzeski said earlier in the week. "Over the past week, the ECB has again fulfilled its role as the Eurozone's fire brigade," Brzeski said. "Now, it is time to sit back and take a break." In a bid to avert a credit crunch, the ECB infused EUR 529.53 billion three-year loans to 800 banks via its long-term refinancing operation, or LTRO, on February 29. This helped reduce yields on Italian and Spanish bonds and boosted investor confidence, analysts said.
It was the second offering of three-year loans after a similar operation in December. The cheap loans were offered to banks through the LTRO so as to restrain them from curbing loans to businesses and consumers as well as to ease fears of banks running out of money. In the post-meeting press conference due to begin at 8.30 am ET, President Draghi will no doubt highlight the vital support that the ECB's recent LTROs have provided to the banking sector, Capital Economics Senior European Economist Jennifer McKeown said ahead of the announcement. "But he may warn again that the euro-zone economy still faces the risk of a major credit crunch," she said.
The recent spike in global oil prices is likely to limit the ability of the central bank to lower rates further going forward. The ECB is set to release its staff macroeconomic projections today, which is likely to reveal an upward revision to the 2012 inflation forecast, currently at 2 percent. Inflation in the 17-nation currency bloc rose to 2.7 percent in February, which is higher than the 'below, but close to 2 percent' target. GDP shrank 0.3 percent in the fourth quarter, reflecting the widespread weakness in spending, investment and foreign demand amid fiscal squeeze and debt woes.