European Central Bank leaves interest rates unchanged at record lows

FRANKFURT, Germany – The European Central Bank left its key interest rate unchanged at a record low Thursday, holding off on further stimulus even as the economy across the 17 European Union limps through a recession.

The bank's 22-member governing council kept the refinancing rate unchanged at 0.75 percent. The rate determines what private-sector banks are charged for borrowing from the ECB, and through that what rate the banks set for their businesses and consumer clients.

Markets are now waiting for a news conference by President Mario Draghi, who is expected to announce the bank is cutting its growth forecast for next year.

A rate reduction in theory could stimulate the eurozone's economy by making it easier to borrow, spend and invest. But rates are already low, and borrowing remains weak. There are only a few early signs that previous rate cuts and stimulus measures are finally trickling through to the wider economy.

The eurozone economy shrank 0.1 percent in the third quarter and is expected to fall further in the last three months of the year. Market analysts expect the ECB to cut its growth forecast for next year to around zero from 0.5 percent in September, bringing its outlook in line with 0.1 percent predicted by the European Union's executive arm, the Commission.

Growth is suffering as governments slash spending and raise taxes to try to reduce levels of debt piled up from overspending in the case of Greece or real estate bubbles and banking crises in Spain and Ireland. Greece, Portugal, Ireland and tiny Cyprus have already requested bailouts, while Italy and Spain, the eurozone's third- and fourth-largest economies, teetered on the edge of needing help this summer.

Some analysts think the bank may now consider it has done enough to help the economy after a year of drastic measures. The most important was an offer to buy unlimited amounts of bonds issued by of Europe's heavily indebted countries. It also made €1 trillion ($1.3 trillion) in cheap, long-term loans to stabilize shaky banks last December and February, and cut rates a quarter point in July.

The bond purchase plan announced in September has helped stabilize the eurozone debt crisis. The purchases would aim to drive down bond interest rates, which would lower borrowing costs for indebted countries such as Spain and Italy and make it easier for them to carry their debt loads.

Although no bonds have been bought, the mere possibility has influenced the bond market and for now pushed borrowing costs back to sustainable levels for those two countries. The interest yield on Spanish 10-year bonds is at around 5.4 percent now, down from 7.6 percent in July. Italy's costs to borrow for 10 years are now down to 4.4 percent, down from over 7 percent at the start of the year and close to the country's average for the past decade.

But while governments are breathing easier, that hasn't restarted growth.

Bank officials and analysts have questioned how much good further measures such as rate cuts would do. The problem is that the stimulus from earlier rate cuts and the flood of cheap loans to banks did not make it through to the economy in the form of more borrowing and activity. Businesses were reluctant to take on the risk of more borrowing. And in the troubled countries, borrowing costs for businesses remained high despite low ECB rates. This is because those countries' struggling banks were still working off losses from the past five years of global financial and economic turmoil.

The ECB has tried to make sure that its crisis efforts are making it through to the eurozone's wider economy — but it is taking time to be felt and fear and reluctance remain. While some business confidence indicators are beginning to rise and the supply of money in the economy is increasing, consumer spending sagged 1.2 percent in October.