ECB leaves interest rateunchanged at 0.5%

The ECB left the main interest rate unchanged at 0.5% at its October meeting. The bank’s president, Mario Draghi, said that he was leaving open all policy levers at his disposal to ensure that the fragile recovery remained on track.

An interest rate cut was discussed at yesterday’s meeting, but on balance the board of governors decided to leave it unchanged, he added.

“As expected, the ECB left interest rates unchanged as the outlook for growth that it presented last month has so far been confirmed by incoming data. We agree with the ECB’s analysis of growth prospects for the eurozone. The region is likely to stay out of recession and recover gradually. However, risks to growth remain skewed to the downside,” said Marie Diron, senior economic adviser to Ernest & Young.&.

“Mr Draghi suggested that a new injection of liquidity (LTRO) is likely. This could indeed ease the uncertain phase as the ECB prepares its Asset Quality Review of banks’ balance sheets. However, as stressed by Mr Draghi, providing liquidity should not be seen as a substitute for adequate capital positions. The eurozone’s banking sector needs stronger balance sheets to ensure robust growth in the medium-term. We hope that the ECB’s assessment will be balanced and will prompt an adequate response by banks and governments to improve capital ratios where needed,” she added.

Mr Draghi told reporters that the European-wide stress tests of the banking system had to be concluded before the Single Supervisory Mechanism (SSM) becomes operational, which is scheduled for the end of next year.

There’s a “general determination” to have adequate measures in place when the ECB takes on its new role as a bank supervisor, claimed Mr Draghi. He said capital injections into banks probably won’t count against budget ceilings under the currency bloc’s rules because they will be one-off measures.

“That’s another thing that quite astonishes me as the doubts that have been expressed about whether national backstops will be in place,” he added. “In fact, there is an explicit reassurance about this in the conclusion of the last European Council, where there is an explicit reference to national backstops.”

Euro-area nations now are debating what kind of financing options need to be in place to head off contagion from capital shortfalls that are uncovered.

EU financial services chief Michel Barnier has proposed a Single Resolution Mechanism that would have a central fund handle the costs of failing banks and give decision-making authority on resolution decisions to the Brussels-based European Commission. Germany has led objections to the proposed fund and also the commission’s proposed powers.

Mr Draghi said the ECB will decide when a bank under its supervision is viable and not and what to do after it fails. He said the ECB should be only an observer on resolution and not hold a voting role on any decision-making board.

“We view the two moments of assessing the known viability of a certain banking concern and deciding which action should be undertaken as clearly separated,” Draghi said. The ECB will take care of the first part, and the SRM should handle the second, he said.

His remarks counter a proposal from Germany’s main opposition party, the Social Democrats, who called for the ECB to take control of failing euro-area lenders. Chancellor Angela Merkel has favoured using a network of national bank regulators to handle bank resolution, rather than Barnier’s proposed central system.

Draghi reiterated the ECB’s plan to release details of its bank-review process later this month. The euro area needs to “harmonise” its definitions of non-performing loans and to make sure the reviews are rigorous.

“To be credible, they have to be transparent and rigorous, otherwise they’re useless,” Mr Draghi said.

Mr Draghi said he hopes credit will recover before the asset-quality review takes place.

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