Credit line details to be decided

A decision on what type of precautionary credit line could be extended to Ireland will be made before the country exits the bailout programme in November, the president of the ECB, Mario Draghi, said at its monthly meeting.

He noted Ireland had met the full terms of its programme and had made good progress in its fiscal adjustment, “but challenges remain in the financial sector.”

Earlier yesterday, the head of the Eurogroup of finance ministers, Jeroen Dijsselbloem, told the European Parliament that Ireland would get support when it exits the bailout programme, although he declined to provide details.

The ECB’s outright monetary transactions (OMT) programme was set up to provide short-term support to countries in return for accepting conditions. It has so far not been used.

The ECB left the main interest rate at 0.5%. Mr Draghi said monetary policy would remain accommodative for the foreseeable future and did not rule out introducing a further rate cut. “We have a downward bias in interest rates for an extended period of time.”

The 17-member ECB governing council discussed a possible rate cut at yesterday’s meeting, he added.

Some members favoured a reduction in the key interest rate on the basis that the nascent economic recovery is very fragile.

Moreover, the money market rates show that the financial sector remains fragmented throughout the region, with bank lending rates much higher in the periphery than in the core.

However, other council members cited the improved economic fundamentals as a reason for keeping the interest rate at the current level, he added.

The ECB revised upwards its growth for this year. Previously it forecast that the eurozone would contract by 0.6% in 2013, whereas it now sees the region’s economy contracting by 0.4%. However, its forecast of GDP growth of 1.1% next year has been scaled back to 1%.

Overall, Mr Draghi announced no new policy initiatives. “In order to further reduce imbalances and to foster competitiveness, growth and job creation, euro area countries need to continue with their reform agenda. As regards fiscal policies, governments should not unravel their efforts to reduce deficits and put debt ratios on a downward path. The composition of fiscal consolidation should be geared towards growth-friendly measures which have a medium-term perspective and combine improving the quality and efficiency of public services with minimising distortionary effects of taxation.

“In terms of economic policies, product marketreforms to increase competitiveness will facilitate the creation of new businesses, support the tradable goods sector and foster job creation, while high unemployment rates require decisive structural reforms to reduce rigidities in labour markets and to increase labour demand.”