ECB chief sees signs of stabilization in economy

European Central Bank leaves rates alone as economy, debt crisis show signs of improvement

Associated Press

FRANKFURT, Germany (AP) -- European Central Bank head Mario Draghi says the eurozone economy is showing "signs of stabilization" but that inflation will stay above the bank's target for all of this year.

Draghi dropped the word "tentative" from last month's assessment of the steadying economy, making his outlook slightly less pessimistic.

Eurozone inflation last month crept up to 2.7 percent, above the bank's goal of just under 2 percent.

Draghi said "the rate was likely to stay above 2 percent in 2012" mainly due to higher oil prices.

Higher inflation would argue against further rate cuts. The bank left its key rate unchanged Thursday at a record low of 1 percent.

Draghi said keeping inflation expectations under control was "of the essence."

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

FRANKFURT, Germany (AP) -- The European Central Bank left its key interest rate unchanged Thursday at a record low of 1 percent, holding off on further measures to boost the shaky economy in the 17 countries that use the euro.

Market concern over some debt-stricken European governments such as Spain and Italy has eased recently, and investors and analysts are waiting to see whether ECB president Mario Draghi gives a slightly more upbeat assessment of prospects for growth.

Recent indicators suggest the current economic slowdown across Europe might not be too deep. That would give the bank a reason to hold off on more cuts.

The ECB is waiting to see whether its more than euro1 trillion in cheap, three-year loans to hundreds of banks handed out in December and again last week will result in more lending to businesses and consumers. The loans have helped steady wobbly banks and lowered borrowing costs for indebted governments like Italy and Spain.

The ECB's loan offerings Dec. 21 and Feb. 29 are credited with pulling Europe back from the debt crisis brink by offering a total of euro1 trillion ($1.32 trillion) to banks. That eased a looming credit crunch, supported investor confidence, and caused borrowing rates to ease for financially weak countries like Italy and Spain.

With markets now more stable, and inflation still higher than the bank likes to see, most analysts expect the 23-member governing council to decide to leave interest rates at 1 percent — probably for several months — and hold off on more emergency measures such as the cheap loans.

Draghi will likely face questioning at his post-decision news conference about warnings from Germany's Bundesbank, about the risk the ECB has taken on by loosening rules for collateral on the emergency loans.

The Bundesbank, which holds one seat on the ECB council, apparently voted in favor of the latest bank loans. But its head, Jens Weidmann, has expressed concern that excess liquidity can lead banks to buy risky assets and said the crisis cannot be solved "solely by throwing money at it."

Whatever the longer-term risks, few deny the bank loans have eased the debt crisis by at least buying governments time to clean up their finances and take steps to improve long-term economic growth.

After the first issue of emergency loans in December, it became clear that some banks were using the money to buy government bonds, lowering bond interest rates and borrowing costs for hard-pressed governments. That indirect support was crucial because it is high borrowing costs that pushed Greece, Ireland and Portugal to seek international bailout loans.

Additionally, the high number of banks taking up the second offer — 800 banks took euro530 billion ($695 billion) in the latest offering — suggests that more small banks took their turn loading up on cheap, long-term financing. Those banks in turn are the ones most likely to lend to smaller companies, which employ most of the eurozone's workers.

Attention is now turning to whether the money will ever make it to companies and consumers in the form of loans that could help the economy grow. The eurozone shrank by a quarterly rate of 0.3 percent in the final three months of 2011.

The Bank of England also kept rates unchanged, leaving its benchmark at the record low of 0.5 percent. Though the British economy contracted in the last quarter of 2011, there have been some recent signs of an improvement.

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