ECB Raises Inflation Projects, Keeps Rates Unchanged

Despite the several interest rate cuts and Long-term refinancing of Euro 1 trillion, the European economy has not shown any sign of revival. Amid this subdued growth projections the European Central Bank yesterday kept the interest rates unchanged. It has also increased the inflation estimates for the year and has said that the rates may come down next year. The bank earlier admitted that the sovereign debt crisis has now started to spread to Germany. 

ECB President Mario Draghi in September had said that he will do whatever it takes to keep the integrity of the Eurozone. As part of this, ECB unveiled a bond-buying program called Outright Monetary Transactions (OMT) to restore the transmission of ECB rates in September this year. It was largely aimed towards such countries as Greece, Italy and Spain in which the borrowing costs had surged. Draghi was in full praise as borrowing costs in some countries have declined after the announcement of OMT. In Spain the yields have come down by 200 basis points which is why Spain is delaying the bailout plan. The ECB president declined to comment on the Spanish bailout plan and said that it is up to the government of Spain. 

ECB also said that after the announcement of OMT the funds are returning back to the Euro market, thus easing the liquidity. The market confidence has improved in the past few months. He also praised Greece which yesterday approved of new austerity measures. The overall economic activity remains very weak in the Eurozone area. The balance-sheet adjustments (high debt burden) and increasing uncertainty is weighing high on the Eurozone economic outlook. He said that the governments should forcefully proceed for the restructuring of the financial sector which will restore the confidence levels. 

The ECB in its presentation also said that the inflation is likely to remain over 2 per cent due to the high energy prices and increased indirect taxes in some of the Euro countries. The next year’s inflation projections also remain high and may come down afterwards due to the energy prices. 

Meanwhile the Euro area figures show that the GDP declined by 0.2 per cent on a sequential basis after flat growth in the June quarter. The ECB also said that the second half of the year will also remain weak. Even for the next year i.e. for 2013, the growth may not pick up, which is an alarming signal for the equity markets. It has so far not taken any OMT but said that if required it will undertake OMTs which will help avoid extreme scenarios.