FRANKFURT — The European Central Bank left its benchmark interest rate unchanged Thursday, choosing not to respond to signs of increasing financial tension in the euro zone and a spike in government borrowing costs.
The E.C.B. kept its main rate at a record low of 0.5 percent, as expected. The relative calm in the euro zone has been threatened in recent weeks by a political crisis in Portugal, a rise in the risk premium that investors demand on bonds issued by Italy and other troubled countries, and reluctance by political leaders to take bold steps to build a stronger currency union.
Mario Draghi, the E.C.B. president, has in recent weeks stressed that policy makers were ready to take action if needed, but he and other members of the governing council have few obvious options left to stimulate the slumping euro zone economy.
“The bank has nothing more it can do within its institutional framework to help return the euro land economy to prosperity,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients Wednesday.
Mr. Draghi has often stressed that E.C.B. anti-crisis measures could only buy time for political leaders to take action, for example by removing barriers to entrepreneurship in countries like Italy or cooperating more closely to fix ailing banks.
But now that fear of a euro zone breakup has ebbed, political leaders seem to have lost the will to address flaws in the currency union. An agreement by national leaders last month on a so-called banking union, designed to make the euro zone less prone to financial crises, fell short of what economists say is needed to deal with weak lenders and restore the flow of credit.
In recent days market borrowing costs for Italy and Spain have risen again, after a political crisis in Portugal raised questions about whether governments will be able to withstand public discontent about budget cutting and joblessness.
Further increases in government borrowing costs could test whether the E.C.B. can deliver on its promise last year to buy bonds of troubled countries if needed to eliminate fear of a euro zone breakup. Some analysts doubt whether the program could be deployed quickly in a crisis, since it requires countries to request help and agree to economic reforms and other conditions.
The E.C.B. appears unwilling to take more radical steps to stimulate the economy, such as massive, broad-based bond purchases similar to the quantitative easing used by the U.S. Federal Reserve or Bank of England. Already, the E.C.B. faces a legal challenge in Germany’s Constitutional Court to the bond buying program and is probably reluctant to further alarm Germans fearful that they will wind up paying for problems in Italy and Spain.
The E.C.B.'s job is further complicated by signs that the Federal Reserve could begin to gradually roll back its economic stimulus in the United States. Expectations of tighter monetary policy in America have rattled financial markets in Europe, and Mr. Draghi may try to reassure investors that the E.C.B. is a long way from going in the same direction.
“President Draghi might note that contrary to market expectations the E.C.B. has not followed the strategy pursued by the Federal Open Market Committee in recent years,” economists at Royal Bank of Scotland wrote in a note to investors earlier this week, referring to the Federal Reserve’s policy-making panel.
The E.C.B. kept its main rate at a record low of 0.5 percent, as expected. The relative calm in the euro zone has been threatened in recent weeks by a political crisis in Portugal, a rise in the risk premium that investors demand on bonds issued by Italy and other troubled countries, and reluctance by political leaders to take bold steps to build a stronger currency union.
Mario Draghi, the E.C.B. president, has in recent weeks stressed that policy makers were ready to take action if needed, but he and other members of the governing council have few obvious options left to stimulate the slumping euro zone economy.
“The bank has nothing more it can do within its institutional framework to help return the euro land economy to prosperity,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients Wednesday.
Mr. Draghi has often stressed that E.C.B. anti-crisis measures could only buy time for political leaders to take action, for example by removing barriers to entrepreneurship in countries like Italy or cooperating more closely to fix ailing banks.
But now that fear of a euro zone breakup has ebbed, political leaders seem to have lost the will to address flaws in the currency union. An agreement by national leaders last month on a so-called banking union, designed to make the euro zone less prone to financial crises, fell short of what economists say is needed to deal with weak lenders and restore the flow of credit.
In recent days market borrowing costs for Italy and Spain have risen again, after a political crisis in Portugal raised questions about whether governments will be able to withstand public discontent about budget cutting and joblessness.
Further increases in government borrowing costs could test whether the E.C.B. can deliver on its promise last year to buy bonds of troubled countries if needed to eliminate fear of a euro zone breakup. Some analysts doubt whether the program could be deployed quickly in a crisis, since it requires countries to request help and agree to economic reforms and other conditions.
The E.C.B. appears unwilling to take more radical steps to stimulate the economy, such as massive, broad-based bond purchases similar to the quantitative easing used by the U.S. Federal Reserve or Bank of England. Already, the E.C.B. faces a legal challenge in Germany’s Constitutional Court to the bond buying program and is probably reluctant to further alarm Germans fearful that they will wind up paying for problems in Italy and Spain.
The E.C.B.'s job is further complicated by signs that the Federal Reserve could begin to gradually roll back its economic stimulus in the United States. Expectations of tighter monetary policy in America have rattled financial markets in Europe, and Mr. Draghi may try to reassure investors that the E.C.B. is a long way from going in the same direction.
“President Draghi might note that contrary to market expectations the E.C.B. has not followed the strategy pursued by the Federal Open Market Committee in recent years,” economists at Royal Bank of Scotland wrote in a note to investors earlier this week, referring to the Federal Reserve’s policy-making panel.