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European Union

ECB holds interest rates steady, mulls more monetary action

The European Central Bank (ECB) has left its key interest rate at a historic low despite concerns about deflation and a weak recovery in the eurozone. Bank officials, however, weigh options for further monetary action.

The European Central Bank (ECB) kept its benchmark refinancing rate at a record low of 0.25 percent. At the same time, interest rates on the bank's marginal lending facility and on its deposit facility remained unchanged at 0.75 percent and zero percent respectively, the central bank for the euro area announced Thursday.

The decision was made by the ECB's rate-setting governing committee at a meeting in Frankfurt, and was widely expected by analysts. However, tepid economic growth in the 18-nation currency area and mounting fears of deflation might spur the ECB into fresh monetary action in future, they said.

"The pressure on the central bank to take more action to support the euro-zone's fragile recovery is likely to continue to build," Jonathan Loynes, Chief Economist at Capital Economics told AP news agency.

Eurozone countries record weak 3rd quarter growth

Despite improving business confidence in the eurozone, most of the bloc's economies recover only slowly from a deep recession. Eurozone nations, especially in the area's southern periphery, are being held back by a struggling banking system which restricts lending and by governments attempting to reduce their huge debts by cutting spending.

Moreover, EU data released this week showed a surprise drop in eurozone inflation from 0.9 percent in November to 0.8 percent December. This has fuelled fears of a deflationary spiral marked by falling consumer spending and business investment which might cause less growth and higher unemployment.

Therefore, the ECB is said to weigh options for further monetary action, including cutting its refinancing interest rate once again. Already in November, the ECB trimmed its benchmark rate 25 basis points, noting that 0.7 percent inflation in October was well below the desired target of 2 percent.

Other measures currently considered by the ECB is a negative deposit rate to punish banks for storing money with the central bank, as well as more cheap loans to boost the banks' liquidity and facilitate lending to the real economy.

uhe/hc (dpa, AP, AFP)

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