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European Central Bank leaves interest rate unchanged

Disappointment in struggling eurozone countries as ECB base rate stays at 1%

The European Central Bank dismayed political leaders in the southern half of Europe after it left its benchmark interest rate unchanged at 1% for another month.

Politicians in Spain, France and Italy were hopeful that the ECB would cut rates to offset rising debt burdens and help save them from further ratings downgrades. Greece, Portugal and Ireland, the three countries already in receipt of bailout funds from Brussels, were also keen to see lower rates that would cut their borrowing costs and, in the case of Lisbon and Dublin, prevent the need for further bailouts.

The bank has now left rates alone for two straight meetings while it waits to see whether the eurozone economy needs more help from further reductions. Many economists predict at least a mild recession in the eurozone, which policymakers expect will push inflation below the central bank’s 2% target.

The prospect of a default by Greece also poses a problem for the central bank, which is expected to delay any loosening of monetary policy until a further bailout deal is struck between Athens and the “troika” of the ECB, the European Union and the International Monetary Fund. Economists say the ECB needs to keep its powder dry in case a Greek crash requires a determined response.

In recent months the ECB has extended direct support to the eurozone banking sector through almost €500bn of emergency loans.

ECB president Mario Draghi will face questions at a news conference later about whether the bank will contribute to a new bailout for Greece by giving up profits on Greek government bonds it holds. Draghi and his colleagues on the ECB council have refused to join the negotiations with Greek bondholders in the private sector – mainly European and US banks – that is expected to result in a 70% loss for those lenders.

But the ECB will come under pressure to forgo the returns on Greek debt that it bought at bargain prices to allow the Greek exchequer to boost its own funds.

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