MercoPress. South Atlantic News Agency

Fearing deflation Euro bank leaves interest rate unchanged at record low

ECB slightly downgraded its inflation estimate to 1% in 2014 from its forecast of 1.1% made at the end of last year

The European Central Bank (ECB) kept on Thursday its benchmark interest rate at its record low of 0.25%, despite fears inflation could get stuck in a “danger zone” below 1%. The bank slightly raised its forecast for growth to 1.2% in 2014, but dropped its inflation estimate.

 Euro-zone interest rates remained unchanged since November 2013, when the bank said it expected “a prolonged period of low inflation”. In February, Euro zone inflation was at 0.8%, well below the ECB's 2% target, which has prompted deflation worries. However, the ECB has been confident that Euro-zone economies are recovering from recession.

The bank decided to leave the rate unchanged as there were continued signs of recovery, ECB president Mario Draghi told a news conference in Frankfurt. “We saw our baseline by and large confirmed,” he said. “There is a continuation of a modest recovery.”

Possible threats to growth included geopolitical risks such as tensions in Ukraine, Mr Draghi said.

“The geopolitical risks in the area could quickly become substantial and generate developments that are unforeseeable and potentially of great consequence,” he said.

Nevertheless, the bank slightly raised its projection for Euro-zone growth in 2014 from 1.1% to 1.2%. The bank also expects a gradual increase in growth to 1.5% in 2015 and 1.8% in 2016.

Any repercussions on Euro-zone growth from the Ukraine crisis were likely to be mild in the near future, but could be “very serious” in a year and a half, Mr. Draghi said.

However the ECB slightly downgraded its inflation estimate to 1% in 2014 from its forecast of 1.1% made at the end of last year. Inflation is expected to gradually increase to 2016 towards 2%.

“Inflation expectations for the Euro area over the medium to long term continue to be firmly anchored,” he added.

An initially positive reaction by European equity markets to the unchanged ECB interest rate stalled on Thursday. The markets had expected ECB action to inject liquidity into the region's financial system.