By Simon Miller

With inflation likely to remain over 2% in 2012, the European Central Bank (ECB) has kept interest rates unchanged at 1%.

Despite inflation expectations, the ECB said that it expected price developments to remain in line with price stability with the pace of monetary expansion remaining subdued.

Speaking in Barcelona, ECB president Mario Draghi said the eurozone’s economy remained uncertain and although activity was expected to recover gradually over the course of the year, the outlook remained subject to downside risks such as sovereign debt markets and credit conditions “as well as the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment”.

He pointed out that over the last few months the ECB had implemented both standard and non-standard monetary policy measures.

“This combination of measures has helped both the financial environment and the transmission of our monetary policy. Further developments will be closely monitored, keeping in mind that all our non-standard monetary policy measures are temporary in nature and that we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner,” Draghi added.

According to the ECB the monetary analysis indicated that the underlying pace of monetary expansion has remained subdued, with somewhat higher growth rates in the past few months. The annual growth rate of M3 was 3.2% in March 2012, compared with 2.8% in February. Since January the central bank had observed a strengthening in the deposit base of banks.

The annual growth rates of loans to non-financial corporations and loans to households (adjusted for loan sales and securitisation) stood at 0.5% and 1.7% respectively in March, both slightly lower than in February. The volume of MFI loans to non-financial corporations and households remained practically unchanged compared with the previous month.

The ECB also said that net tightening of credit standards by euro area banks declined substantially in the first quarter of 2012 as compared with late 2011, for both loans to non-financial corporations and loans to households, also on account of improvements in funding conditions for banks.

It added that the demand for credit remained subdued in the first quarter of 2012, reflecting weak economic activity and the ongoing process of balance sheet adjustment in non-financial sectors.

Draghi continued: “The full supportive impact of the Eurosystem’s non-standard measures will need time to unfold and to have a positive effect on the growth of loans when demand recovers. In this context, it should be noted that the second three-year longer-term refinancing operation was only settled on 1 March 2012.”

He continued: “Looking ahead, it is essential for banks to strengthen their resilience further, including by retaining earnings. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.”

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