A picture illustration taken with the multiple exposure function of the camera shows a one Euro coin and a map of Europe. The cost of living in the euro zone rose more than expected in December but remained benign enough to allow a possible cut in interest rates in 2013 to support the bloc's feeble economy. — Reuters FRANKFURT — The euro zone economy will recover later in 2013 and there are already some signs of stabilization, the European Central Bank said on Thursday after it unanimously held interest rates at a record low. The ECB left rates at 0.75 percent, following fledgling signs of life in the euro zone economy and with inflation still above target, and its president struck a slightly more optimistic tone about future prospects. “The economic weakness in the euro area is expected to extend into 2013,” Mario Draghi told a news conference. “Later in 2013, economic activity should gradually recover.” Last month, Draghi said there was “a wide discussion” on reducing rates — a comment that fed expectations a cut could soon follow. On Thursday, the decision to keep policy on hold was unanimous, Draghi said, because some indicators had begun to stabilize, “albeit at low levels”, while financial market confidence had improved significantly. Borrowing costs of euro zone countries at the sharp end of the bloc's debt crisis have tumbled sharply since Draghi pledged last year to do whatever it took to shore up the currency area, by buying government bonds in potentially unlimited amounts. So far, that effect has endured without the ECB having to put its money where its mouth is. “Bond yields and country CDS (bond insurance costs) are much lower, significantly lower. Stock markets have increased. Volatility is at a historical minimum,” Draghi said. A Reuters poll published on Monday had pointed to the ECB keeping rates on hold, though the economists surveyed were split on the chances of a cut in the next few months. “This is not a surprise,” Nomura economist Nick Matthews said of Thursday's rate decision. Stronger survey data strengthened the resolve of those at the ECB against a rate cut, he said. The euro climbed to a one-week high against the US dollar, safe haven German Bund futures fell and European stocks rallied in response to the unanimous view that looser policy was not required. An improvement in euro zone business morale in December, when a survey also pointed to a slowing service sector contraction, suggests a modest turnaround in the bloc after a grim fourth quarter. But Draghi remained cautious. “The risks surrounding the economic outlook ... remain on the downside,” he said. “They are mainly related to slow implementation of structural reforms in the euro area, geopolitical issues and imbalances in major industrialized countries.” National government policies to reform and improve competitiveness remained of paramount importance, he said. ECB staff projections published last month saw inflation at about 1.4 percent in 2014, which would usually justify another interest rate cut. The central bank also sees inflation falling below 2 percent this year with underlying price pressures remaining moderate. – Reuters
