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ECB primed to act after Brexit shock

European Central Bank chief Mario Draghi says financial markets have held up well to the shock of Brexit

The European Central Bank is ready, willing and able to help put the eurozone economy back on its feet, if needed, even if financial markets have held up so far to the shock of the Brexit referendum, president Mario Draghi said on Thursday. "If warranted to achieve its objective, the governing council will act by using all instruments within its mandate. I would stress our readiness, willingness, ability to do so," Draghi said. Nevertheless, the ECB opted to keep key interest rates unchanged at its policy meeting, despite the shock left by the British vote last month to quit the European Union. Draghi said the markets had held up well so far to the shock decision. "After the UK referendum, euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience," he said. But it was still too early to gauge the full economic impact of the seismic vote, Draghi said. "Over the coming months, when we have more information, we will be in a better position to reassess the underlying macroeconomic conditions, the likely paths of inflation and growth, and the risks around those paths," Draghi said. The ECB is scheduled to draw up its latest staff economic projections in time for its next meeting in September. - Beginning to work - Already, the ECB has rolled out a raft of different measures to help get the eurozone economy back on its feet. It has slashed interest rates to all-time lows, pumped vast amounts of liquidity into the financial system via cheap loan schemes to banks, and embarked on an asset purchase programme to try and drive up chronically low inflation in the single currency area. But eurozone inflation stood at a mere 0.1 percent in June, far below the level of just under 2.0 percent that the ECB regards is conducive to healthy economic growth. Nevertheless, there are signs that the ECB measures are beginning to work. In its latest quarterly bank lending survey, the ECB found that banks are easing credit standards for loans to companies, an encouraging sign, since the chronic weakness of credit activity in the euro area has previously been blamed for the absence of any noticeable recovery. Furthermore, demand for loans is also increasing, the survey showed. - Italian banking fears - Draghi tried to assuage fears that a new banking crisis might be brewing in Europe. Fears are rife on the financial markets that Italy, in particular, could cause a return of the eurozone debt crisis if it does not address the 360 billion euros ($398 billion) in bad debt sitting in its national banks. Markets have turned sour on several Italian banks, most notably Italy's number-three lender and the world's oldest bank, Banca Monte Paschi. But banks are generally in much better shape than in 2009 and have substantially strengthened their capital buffers, Draghi said. Their average core capital ratio -- the amount of funds they can call upon to absorb losses -- has increased from around nine percent to 15 percent, thanks to robust supervisory systems and regulations that have since been put in place. Nevertheless, bad debt, or so-called non-performing loans (NPLs), posed a "significant problem for the future ability and the capacity the banks have of lending," Draghi said. "It's a problem that needs to be addressed because it's an obstacle to the transmission of monetary policy," Draghi said. - Waiting until September - Analysts were divided about whether the ECB really would embark on fresh stimulus measures at its next meeting in September. "After leaving policy on hold today, the ECB also stopped short of promising imminent policy easing," said Capital Economics Jennifer McKeown. "But Draghi reiterated that the bank is ready to act and we believe that it will up the pace of asset purchases and possibly cut interest rates at its next policy meeting in September." ING DiBa economist Carsten Brzeski was not so sure. "Draghi's comments during the press conference did not give any hint on possible next ECB steps. (He) kept all of his cards to his chest," the expert said. For Natixis econmist Johannes Gareis, the "ECB is still in a wait and see mode." "While we think that the ECB has to tweak its QE parameters sooner rather than later, we do not expect significant easing action," the analyst said.