ECB rates on hold amid signs of life in euro zone

The European Central Bank kept interest rates at 1 per cent yesterday as signs of life emerge in the euro zone's economy.

The ECB's announcement in Frankfurt came after markets received a lift from successful bond sales by Spain and Italy earlier in the day. Bloomberg

The European Central Bank (ECB) kept interest rates at 1 per cent yesterday as tentative signs of life emerge in the euro zone's troubled economy.

While the bank decided to keep rates on hold, policymakers left the door open for a further cut.

"It's a wait-and-see mode but does not mean they are done with the interest rate cycle," said Nick Matthews, a senior European economist at Royal Bank of Scotland. "We don't expect 1 per cent to be the floor and there's room for a further cut in the future."

The ECB's announcement in Frankfurt came after markets received a lift from successful bond sales by Spain and Italy earlier in the day. Both countries borrowed money at sharply lower costs.

The Spanish treasury raised €10 billion (Dh46.8bn) from the auction of three bonds, double its target of up to €5bn.

Yields dropped by about 1 percentage point. Italy paid less than half the amount it spent a month ago to sell one-year bills at its first auction of the year.

The FTSEurofirst index of top European shares gained about 0.5 per cent to 1,027.60 after news of the auctions. The euro also strengthened. More positive signs have emerged from the euro-zone economy.

Data this week showed German exports jumped 2.5 per cent, indicating the bloc's largest economy is still motoring.

But economists say it is still too early for the ECB to change tack as Greece remains locked in crisis and other countries falter.

Germany's economy contracted by 0.25 per cent in the fourth quarter, the country's statistics centre estimated on Wednesday.

The ECB has already taken a mix of policy actions in recent months. Last month, it offered banks extended loans, eased borrowing rules and pushed ahead with buying government bonds.

In addition, under its new president, Mario Draghi, it has delivered back-to-back cuts to put interest rates at a record low.

However, analysts still expect interest rates to be lowered in the coming months. Rates have never gone below 1 per cent, even during the 2008 global financial crisis.

Yesterday, the ECB said it would keep the interest rate on its deposit facility at 0.25 per cent and the rate on the marginal lending facility at 1.75 per cent. The Bank of England also left monetary policy on hold.

The central bank's rate-setting monetary policy committee agreed to leave the bank's key interest rate at a record low 0.5 per cent.

But with the economy faltering, the bank is expected to provide more stimulus in the form of additional bond buys soon.

Calls yesterday for united action to foster growth across the EU came from Enda Kenny, the Irish prime minister. Ireland had been in the eye of the storm of the euro-zone crisis until it received a financial bailout.

A new treaty to tighten budget controls drafted by European leaders last month was not sufficient on its own to achieve progress, he said at an event in London.

European leaders agreed to draft a new treaty to increase budget controls in the euro zone last month, but while this represents significant progress it is not sufficient on its own, Mr Kenny said.

"Clearly we are not yet at a point where market confidence in the euro has been restored.

"We must ensure that more binding, durable and enforceable fiscal rules go hand-in-hand with funding certainty for countries pursuing sound and sustainable economic policies," he said.

* With Reuters and Dow Jones