The European Central Bank kept interest rates at a record low of 0.75% on Thursday in the absence of hard evidence that the eurozone recession is deepening and as inflation remains above its target.
The bank cut its forecast for the eurozone economy to a decline of 0.3% last month, after the region fell back into recession in the third quarter of 2012. But recent survey data suggest business confidence is recovering slowly despite signs that core countries such as Germany are suffering.
And inflation, while falling, remains above the ECB’s target of just under 2%.
Some officials are also concerned that any further cut in the main refinancing rate may push the deposit rate into negative territory, effectively charging banks for holding funds with the ECB. An alternative would be to allow the differential to narrow, though the rates typically move together.
Earlier, the Bank of England also held interest rates at a record low of 0.5%, and did not add to its quantitative easing target of £375 billion ($600 billion).
The decisions were in line with market expectations and reflect a desire by the bank to give its Funding for Lending program — a way of providing cheap funding for banks to lend to businesses — more time to work through the economy. There are signs that the program is already making it easier for companies to borrow.
BoE officials are also wary of easing policy further while inflation remains significantly above the bank’s target of 2%, despite evidence that subdued consumer spending, difficult export conditions and the government’s austerity drive may have pushed the economy backwards in the fourth quarter.
Some economists say U.K. conditions may warrant further easing later this year, particularly if the country falls into recession for a third time since the financial crisis. That would present a challenge for incoming governor Mark Carney, who is due to succeed Mervyn King in July.
