ECB holds base rate

ECB holds base rate

Euro notes

The European Central Bank (ECB) left the base interest rate on hold at 1.0% for the seventh consecutive month.

However, economists believe this stability in monetary policy is in “stark contrast” to the growing uncertainty surrounding the future of the euro.

“The latest developments within the euro area are centred squarely on Spain,” said Colin Edwards, economist at the Centre for Economics and Business Research. “The governments’ suggestions of difficulties in refinancing its debt burdens, while lobbying to allow Spanish banks direct access to rescue funds, have intensified concerns over the prospect of a Spanish bailout. As the fourth largest economy within the Eurozone, the concerns regarding Spain may potentially dwarf those which have engulfed Greece.

“With governments across Europe facing tight fiscal constraints, as nations remain in the grip of a period of painful austerity, targeted monetary policy (for example setting low interest rates or through quantitative easing) would usually be used to attempt to promote growth – witness the 0.5% interest rate adhered to by the Bank of England since March 2009. However, the base rate of interest within the Eurozone has yet to come down this far – apparently the ECB appears to see 1.0% as the lower bound.”

The most recently released growth figures show that the Eurozone narrowly avoided slipping into recession. Edwards said this was almost entirely due to strong quarterly growth of 0.5% for Q1 2012 reported in Germany, which may arguably require marginally higher interest rates in order to mitigate inflationary pressures arising from its operation at near full employment.

He said: “In the context of an increasingly politicised euro area crisis monetary policy appears to be a rather blunt tool in tackling more severe structural issues which have placed many European nations at the mercy of the markets. With ever growing uncertainty within the euro area, one thing which governments do seem able to count on is that the ECB is unlikely to use its one size fits all interest rate to provide any boost to the growth prospects of the Eurozone.”

Edwards said he expected interest rates to remain on hold until at least 2014.