ECB sticks to loose policy as economy plummets

The European Central Bank kept its monetary policy on hold for an eighth consecutive month, as the 17-nation economy slumped at 2012-end by the fastest pace since in almost four years.

As expected, the central Bank’s Governing Council decided on Thursday to maintain its benchmark interest rate at a record low of 0.75 percent in a bid to tackle the sluggish economic recovery in euro area.

The ECB also left its deposit facility at a rate of zero and the refinancing facility at 1.5 percent simultaneously, justifying an easing of policy as peripheral economies lack prospects for growth necessary.

Preliminary GDP numbers published Wednesday by the Eurostat confirmed that the 17-nation currency bloc shrank 0.6 percent in the fourth quarter 2012. That was the worst slump since the first quarter 2009.

In the euro area, the ailing economy continue to suffer fragile exports and investment growth, which weighed markedly on the jobs market, prompting policymakers to keep borrowing costs lower one again!

The benchmark has been kept at its all-time low of 0.75 percent since Last July, when the 17-nation currency bloc bowed to the inevitable and fell back into technical recession for the first time in three years.

The feverish debt crisis of the euro zone has been the main reason behind the lousy economic performance in the past few quarters, as the financial trauma took its toll on the bloc’s stronger economies.

For instance, unemployment in the euro area shot an all-time high of 11.9 percent in January, echoing the anemic wage growth from already low rates the impact of government diet on consumer spending.

Germany, the bloc’s largest economy, suffered a shocking slump of 0.6 percent in the three months through December. That was the first contraction in a year, and worst since the depths of 2009 recession.

Germany, which also pays the paymaster role, remains the strongest member sharing the euro, with stronger than expected PMI data, unlike of course the peripherals, and particularly austerity-hit Spain and Italy.  

Well, the political uncertainty also took its toll on the euro zone, with the ongoing deadlock in the Italian government which is likely to further weigh on economic growth in the first quarter of this year.

While uncertainty is still dominating the outlook of the 17-nation currency bloc amid rising unemployment, the ECB warned recently of "downside" risks to growth, signaling the region is not out of the woods yet!

Nonetheless, confidence towards the euro has improved in the past few months and the ECB was somewhat optimistic about the still fragile recovery, at least for the latter of the year, and so on.

New projections for growth, unemployment and inflation will be published by the ECB since it last said the 17-nation economy would contract 0.3 percent, compared with prior forecast of 0.1 percent growth.

The market will closely watch the ECB President Mario Draghi while he explains why the Governing Council decided to leave monetary policy on hold for the third month this year, so traders stay tuned!