ECB holds rates at record low, Draghi talks down deflation risk

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The European Central Bank has left interest rates at a record low at 0.25 percent, but said it remained ready to act in the face of risks to the eurozone economy – particularly turbulence in the emerging markets.

ECB President Mario Draghi, speaking after the latest Bank policy meeting, did not seem worried about a sharp drop in inflation in the region.

He blamed that on the countries that had needed some kind of bailout: “Much of the decline in inflation – in core inflation – actually comes from the four programme countries: Spain, Ireland, Portugal and Greece. So, all in all this would signal more a relative price adjustment than any deflation phenomenon taking place. So I have tried to give you a sense of how complex is the picture, which would explain why – before taking any decision today – we would wait.”

In those battered economies people are spending less so inflation is weak, or in the case of Greece prices are falling dramatically.

The ECB’s inflation target is around 2.0 percent.

Draghi is wary of it getting stuck in what he has called a “danger zone” – below 1.0 percent – thereby hampering the fragile economic recovery.

He again vowed to keep the cost of borrowing at present or lower levels for an “extended period” and surprised financial markets by not signalling a near-term rate cut during his remarks to reporters.

If emerging market turmoil persists, a move is more likely next month when the ECB’s staff will produce fresh economic forecasts. If they downgrade their inflation estimate – already at just 1.2 percent for 2014 – action could follow.

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