THE EUROPEAN CENTRAL BANK (ECB) has kept its key interest rate at a record low of 0.25 percent, as widely expected, holding back for now on further moves to boost the struggling eurozone economy.
The decision follows the ECB’s surprise cut last month of the central “refi” refinancing rate by a quarter-point to counter the threat of deflation, a vicious cycle of falling prices and wages that is poison for the economy.
However, the danger of a plunge into a deflationary spiral appears to have diminished as the eurozone inflation rate nudged back up to 0.9 per cent in November after a sharp fall to 0.7 per cent in October.
“It was no surprise that the ECB chose to leave the refi rate at 0.25 percent today, but the bank remains under pressure to do more to support the eurozone’s fragile recovery,” said Ben May of Capital Economics.
ECB officials have stressed that the eurozone has seen “disinflation” — or slowing price rises — not “deflation”, where prices fall in real terms, encouraging consumers to put off purchases in hopes of further price drops.
Deflation can lead to a vicious cycle of falling prices and demand, and rising unemployment.
The bank’s central aim is to ensure price stability and keep the inflation rate close to but below 2.0 per cent.
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