FRANKFURT—The European Central Bank left its key interest rate on hold at 1%, suggesting officials aren't overly concerned about the severity of the downturn gripping the euro-zone economy.
ECB President Mario Draghi expressed a slightly more upbeat view of the currency bloc's economy than he had in recent months, suggesting business activity is stabilizing.
"According to some recent survey indicators, there are tentative signs of stabilization in activity at low levels," Mr. Draghi told a news conference after the rate decision.
The ECB's existing crisis measures—including nearly €500 billion ($635 billion) in new loans to banks at maturities of three years—are helping stabilize financial markets and avoid a credit crunch, Mr. Draghi said.
Still, the ECB kept its options open for additional rate cuts if the economic downturn escalates. Officials "stand ready to act" amid continued high levels of uncertainty and "substantial" downside risks to activity, Mr. Draghi said.
"The sense of panic that was clearly there late last year has dissipated," said Ken Wattret, economist at BNP Paribas. Prior to Thursday's meeting and news conference, Mr. Wattret had been expecting a rate reduction in February. He now predicts the next rate cut may occur later.
Thursday's pause on interest rates and on other crisis measures ends a frantic start to Mr. Draghi's ECB presidency, which began in November. Mr. Draghi, who used to head Italy's central bank, reversed a pair of 2011 rate increases by his predecessor, Jean-Claude Trichet, with back-to-back cuts in November and December, bringing rates back to record lows. Last month the ECB also pumped €489 billion into European banks with three-year loans, its longest commitment of funds to the banking sector to date.
Mr. Draghi said the three-year loans have been particularly effective at improving conditions in financial markets. Although it isn't clear whether those loans were used by banks to buy government bonds in recent weeks, Mr. Draghi noted that interest rates for many euro-zone government bonds have fallen, and even referred to Thursday's decline in euro-zone bond yields, a rare comment on day-to-day market movements for a central banker.
The ECB "gave to all banks in the euro area an insurance against the risk of being without liquidity…it has been an effective policy measure," Mr. Draghi said. The next installment of three-year loans in February should see "substantial demand," he said.
Mr. Draghi dismissed speculation that banks are simply depositing the money they borrowed from the ECB back at the central bank, even though deposits at the ECB have soared to record highs. The banks that are borrowing from the ECB are generally not the same as those depositing funds with the central bank, he said.
"The message was, it's working," said Mr. Wattret of BNP Paribas, referring to the three-year loans.
Mr. Draghi's remarks underscore how the ECB views its role, and its limits, in combating Europe's debt crisis. The ECB will act aggressively as a lender to commercial banks, but is wary of venturing into huge purchases of government bonds as a way to keep borrowing costs down.
"The route that the ECB has undertaken has been to enhance the bank-lending channel," Mr. Draghi said in response to a question about whether the ECB would consider bond-buying on a bigger scale.
Other major central banks, including the U.S. Federal Reserve, the Bank of England and the Bank of Japan have all bought government bonds on a large scale as part of their efforts to support their economies.
The Bank of England left its key rate unchanged at a record-low 0.5% Thursday. Some economists expect stepped-up purchases of government bonds to be announced as soon as next month to safeguard a fragile recovery in the U.K.
The ECB is constrained by a mandate to focus on keeping annual inflation at just below 2%. It is currently 2.8%, and though the ECB expects it to decline Mr. Draghi said inflation will remain above target for several more months. Despite Mr. Draghi's guarded optimism on the economy, many economists still expect furtherinterest-ratecuts.
German gross domestic product fell around 1% in the fourth quarter, at an annualized rate, the country's statistics agency reported Wednesday, suggesting Europe's largest economy and economic powerhouse may be sliding into a shallow recession—defined in Europe as two straight quarters of contraction.
Industrial production across the euro zone fell for a third straight month in November, according to a report from the European Union's statistics agency on Thursday, further stoking recession fears.
"The recession isn't becoming any more intense, but we're still in recession," said James Ashley, economist at RBC Capital Markets. He expects two more ECB rate cuts this year to 0.5%.
