Moneycontrol.com ECB Leaves Interest Rate Unchanged

BARCELONA — The European Central Bank left its benchmark interest rate unchanged Thursday, choosing not to react immediately to signs that the euro zone economy is continuing to deteriorate.
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      Times Topic: European Central Bank

The E.C.B. left the main interest rate unchanged at 1 percent, tied with the record low. The decision was expected, but analysts also expected Mario Draghi, the president of the E.C.B., to signal increased concern about the state of the euro zone economy when he holds a news conference at 2:30 p.m. local time, perhaps setting the stage for a rate cut in coming months.

The bank’s governing council, making one of its occasional forays outside Frankfurt, met in the country that has become one of the centers of the European debt crisis. At more than 24 percent, Spanish unemployment is the highest in the euro zone.

Mr. Draghi will likely face questions about what he meant last week when he called for a “growth compact” in Europe to augment measures to cut government debt in Spain and other countries.

So far, Mr. Draghi has belonged to the camp arguing that lower government debt is a condition for growth, along with measures to improve economic performance like lighter labor regulation. He has not shown any inclination to allow governments to slow their efforts to get debt under control.

Some economists are urging policy makers to put more emphasis on growth.

“Fiscal austerity is necessary and unavoidable,” Marie Diron, an economist who advises the consulting firm Ernst & Young, said in a statement ahead of the meeting. “But we think that it is essential that the euro zone shifts from a sole focus on austerity to implement growth-enhancing reforms.”

Countries on the so-called periphery of the euro zone, which include Spain, should make their labor markets less rigid and do more to increase productivity, Ms. Diron said, while countries like Germany should try to increase domestic consumption. For example, she said, Germany should free up its service sector, which is subject to strict licensing requirements and other regulations.

Analysts did not expect the E.C.B. to cut rates Thursday, but some have said that a cut in coming months is more likely following a number of negative economic reports. Unemployment in the euro zone rose to 10.9 percent in March from 10.8 percent in February, according to official figures released Wednesday.

During the press conference, analysts will be alert for any signal that a rate cut has become more imminent.

“Draghi is likely to be asked if rate cuts had been discussed at the governing council meeting,” Jens Sondergaard, an economist at Nomura, said in a note Wednesday. “If the answer is yes, it would signal that the E.C.B. is increasingly prepared to act decisively to halt the loss of growth momentum even at a time when euro area inflation is set to remain above target for an extended period of time.”

The E.C.B. meeting came a few days before a presidential election in France where the central bank has been a topic of debate. Nicolas Sarkozy, struggling to win re-election in a runoff Sunday, has suggested the E.C.B. be given a broader mandate to promote growth.

While Germany would certainly veto any change in the E.C.B. charter that took the focus off fighting inflation, the debate illustrates how the central bank has become a political target.

Jack Ewing reported from Frankfurt.