While the European Central Bank raised its forecast for the rest of the year, ECB President Mario Draghi said that the bank will keep interest rates at their historic low levels because a sudden economic downturn is still more likely than a sharp upturn, reports Geoffrey T. Smith for The Wall Street Journal.
ECB expectations for Eurozone contraction
The ECB expects the Eurozone to contract by 0.4 percent instead of 0.6 percent for FY2013, but it also lowered its growth target for 2014 from 1.1 percent to 1 percent. Draghi said that official rates would remain at or below current levels because the economy was still weak, citing credit dynamics in particular.
“It is too early to consider that euro area is experiencing a major improvement in underlying economic conditions,” Societe Generale Michel Martinez wrote in a research brief earlier today. “French unemployment figures and German factory orders acted as a reminder that the euro area recovery is set to remain sluggish in the near term.” With core Eurozone countries showing weakness and the potential for sovereign debt problems on the periphery, a sustained recovery is far from assured.
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Air strike on Syria consequences
There is also the possibility of a U.S. strike on Syria having unintended consequences, including but not limited to a spike in oil prices. “We’re certainly alert to the geopolitical risks that may come from the Syrian situation,” said Draghi.
The ECB governing council has left rates at the historic low rate of 0.5 percent for the fourth straight month. Draghi said that there had been discussion of cutting rates even further. These remarks came shortly after the Bank of England and the Swedish Riksbank similarly left their rates unchanged and Poland’s central bank announced yesterday that it would also keep its rates steady, reacting to the same uncertain recovery that Draghi addressed in his speech.
European central banks also have to account for the possible effects that Fed tapering could have on their own interest rates, possibly driving them up before their economies are ready. Markets were down slightly following the news, latching on to next year’s downgrade as the main takeaway from Draghi’s speech.