Draghi eyes non-rate tools to fuel growth

Written by Agencies | Frankfurt | Updated: Apr 5 2013, 07:38am hrs
Analysts are speculating the ECB might be looking at ways to encourage more lending to companies

European Central Bank (ECB) head Mario Draghi says the bank's governing council discussed a possible rate cut and is looking a various tools beyond lower interest rates in case the euro area's economy needs more of a push.

Draghi said there was extensive'' discussion of interest rate policy at Thursdays 23-member governing council meeting, which ended up leaving the bank's key rate unchanged at 0.75%.

He added that the bank was looking at various instruments, various tools'' beyond interest lower rates to promote growth.

The eurozone is stuck in recession though the ECB predicts a gradual recovery later in the year.

Analysts have speculated the ECB might be looking at ways to encourage more lending to companies. The bank could also extend credits to banks beyond its current three-month limit.

Draghi said Cyprus's initial decision to charge a levy on insured as well as uninsured banks depositors was a mistake. "That was not smart, to say the least, and was quickly corrected," he said.

Draghi also told a news conference that Cyprus's bailout, including hitting wealthy depositors with losses, was not what would happen in further bailouts. "Cyprus is no template," he said.

Earlier in the day, the ECB left its key interest rate unchanged at a record low of 0.75%, holding off on further stimulus for the euro area's slack economy despite signs that a hoped-for recovery may be delayed.

The central bank for the 17 European Union countries that use the euro currency has said it expects a gradual recovery in the euro zone's economy later this year.

Yet recent data has raised doubts. Surveys of services and manufacturing purchasing managers suggest the region's economy shrank in the first quarter of 2013 the sixth time it has fallen in a row.

Unemployment is at 12%, the highest since the euro currency union was formed in 1999.

The benchmark refinancing rate is what the ECB charges banks to borrow from it and so influences how lenders charge companies to borrow, expand production and hire people. So a cut, in theory, would help the economy grow.

Additionally, inflation is low at an annual rate of 1.7%, below the bank's target of just under 2%. That leaves the bank free to cut if it wants, since there's little fear that lower rates could stoke inflation.

Yet bank officials have held off, and indicated a rate cut might do little additional good.

They worry that the current low benchmark rate is not being passed on to companies because of troubled bank finances in heavily indebted eurozone countries. Instead of cutting the main rate, the ECB has tried to address that by letting banks borrow all they want at its regular credit offerings.

Lending also remains weak because companies and consumers often see no reason to risk borrowing in a slack economy.

The Bank of England also left its key rate unchanged on Thursday at a record low 0.5%. But, in an attempt to end years of crippling deflation that has killed off growth in Japan, the country's central bank startled markets on Thursday by saying it would aggressively step up measures to increase the supply of money in the economy and push inflation up to 2%.

The ECB calmed markets after Draghi said last year it would do whatever it takes to preserve the euro and the bank followed through in September with an offer to buy the bonds of indebted countries on the open market.

The ECB has yet to buy any bonds under the offer. But the mere proposal has lowered bond market borrowing rates and given troubled countries more time to straighten out their finances.