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April 28, 2017

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Eurozone rates remain unchanged despite fears of deflation

FRANKFURT -- European Central Bank President Mario Draghi said the eurozone economy remains weak and will recover "at a slow pace" but that, for now, additional stimulus isn't needed.

The bank left its interest rate benchmark unchanged at a record low of 0.25 percent at its meeting Thursday. Some analysts thought it might cut the rate to 0.1 percent.

At a press conference, Draghi repeated the bank's promise to keep rates low "for an extended period" until the economy improves. But he did little to indicate that a rate cut might be imminent and left it open whether the ECB might take other actions, such as new loans to banks to boost confidence in the financial system.

The ECB has predicted a gradual increase in growth this year. But unusually low inflation — of 0.7 percent annually at last count — has raised concerns that the 18 countries that share the euro as their currency may slide into deflation, a sustained drop in prices that can cripple the economy. The eurozone economy grew only 0.1 percent in the third quarter.

Draghi said he didn't see deflation because there was no downward price spiral feeding on itself. The ECB, he said, remained "willing and ready to act" with any of its available measures if it sees the situation worsening. Officials at the ECB are working on different stimulus steps "so when the time comes to activate we are ready to go."

Draghi said the picture of the economy was "complex" and that the bank was watching to see if lending to companies improves, and whether turbulence in emerging markets is only transitory or poses more of a threat to growth. Those issues might be clearer at future meetings, he said.

The bank is facing conflicting signals from the eurozone economy. Some indicators, such as surveys of business managers in the manufacturing and services sectors, suggest growth will pick up slowly.

Other indicators are weak. Aside from the alarming inflation number, lending to companies and consumers remains subdued. Retail sales fell sharply in December, the holiday shopping month.

The benchmark rate is what the ECB charges banks for loans. Through the rate it influences the cost of credit for everybody else. Cutting the rate in theory makes it easier for people to buy new homes and for businesses to borrow and expand production.

However, rates are already very low and the stimulus impulse is not always getting through in the form of more lending.

Some analysts think the ECB could yet lower the key rate and take other actions in the coming months. That could include offering cheap loans to banks as a way to encourage lending and push down the cost of short-term credit in the market.

It's also theoretically possible for the ECB to buy bonds to pump newly created money into the economy, as the U.S. Federal Reserve, Bank of England and Bank of Japan have done. That step seems less likely. ECB officials have alluded to the complexity of bond purchases given 18 different governments that issue debt.

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