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Banking

ECB holds fire on rates despite growing deflation worries

The European Central Bank has decided not to cut its benchmark refinancing rate further despite an alarming drop of inflation across the euro area. Analysts said it was only a matter of time for the bank to react.

The ECB's policy-making Governing Council announced Thursday it would refrain from cutting its interest rates further, at least for the time being. The decision meant it rated signs of a nascent recovery in the eurozone higher than growing fears of deflation in the 18-member single-currency bloc.

The ECB had already cut borrowing costs in November of last year when it reduced its benchmark rate to a record low of just 0.25 percent, down from the previous level of 0.5 percent.

The eurozone's inflation rate slumped to an alarming 0.5 percent in March compared with 0.7 percent in the previous month, marking the lowest increase in the area's cost of living since November 2009. This took consumer prices deeper into what ECB President Marion Draghi (pictured) had called the "danger zone" of inflation below 1 percent, and way below the bank's general target rate of under, but close to 2 percent.

No big surprise to most

Eurozone deflation worries

But with an uptick of inflation expected for April, only a small group of analysts had actually predicted the ECB to cut its interest rates on Thursday, with the vast majority of experts forecasting that neither the bank's benchmark refinancing rate, nor its deposit rate of zero percent would be changed for the time being.

There had been agreement that recent business activities in the eurozone had provided evidence of the eurozone economies' resilience to the Russian-Ukrainian crisis and slower growth in China.

"Recent data have been relatively encouraging, confirming that the moderate recovery is proceeding in line with the ECB baseline scenario," Newedge Strategy analyst Annalisa Piazzo told Reuters news agency.

hg/hc (Reuters, AFP, dpa)

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