ECB Keeps Interest Rates Unchanged

ECB President Mario Draghi
ECB President Mario Draghi

The ECB decided on Wednesday to keep interest rates unchanged at 1%, a decision that many economists had expected from the central banking institution that increasingly finds itself in the spotlight because of growing economic challenges that weigh down the European Union.

ECB President Draghi said today during the press conference in Frankfurt that the euro zone is faced with increased downsized risks.
 
“Economic growth in the euro area remains weak with heightened uncertainty weighing on confidence and sentiment giving rise to increased downside risk to the economic outlook” he said.
 
Draghi reported that the ECB stands ready to act in the future. 
 
The decision by the ECB to not lower interest rates further increases pressure on policy makers in EU countries to deliver further stimulus rather than relying on the “lender of last resort” for economic relief.
 
Last week President Draghi said that the monetary union is “unsustainable” in its current form.
 
Since last December when the ECB last cut interest rates, the economic risks have steadily grown across the European Union.
 
Unemployment in the euro zone has reached 11 percent, the highest level on record. Manufacturing and service industries have contracted at a faster pace than last December when rates were cut.
 
Gross domestic product figures for the euro zone and the wider 27-nation European Union zone were unchanged compared to the end of 2011.
 
New EU Banking Bailout Plan Unveiled
 
The latest proposal that was unveiled today includes a single EU deposit guarantee organization covering all banks in the European union which closely resembles the FDIC, an organization that covers U.S. bank deposits.
 
Among other proposals is a single EU supervisor with final decision making powers for the major banks and a universal set of banking rules.
 
In addition, the proposal includes a common authority and a common fund that would deal with future bailouts required for the cross-border banks that are the primary movers in the European banking system.
 
The ECB has already made a financial commitment to provide a liquidity backstop with LTRO (Long Term Refinancing Operation) that was designed to support the European banking system by lending more than 1 trillion euros to at least 800 banks for a term of up to three years. 
 
Although the LTRO has provided banks with a cheap source of financing, allowing banking institutions to capitalize and stabilize the vulnerable periphery bond markets, the program has not trickled down to regional level and lowered the unemployment levels in critical euro zone regions such as Greece and Spain where growth is desperately needed to pay down their looming debts.
 
EU banks have improved their liquidity position, but that money has not been used for new loans to help Europe to shake off the recession that is casting a dark shadow over Europe.
 
 Australia
 
New economic data in Australia shows a brighter outlook than expected.  GDP rose 1.3% in Australia nearly twice as fast as expected for the country which is heavily dependent on commodity exports for the majority of its economic activity.
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