Draghi pledges to keep interest rates low Mario Draghi said the European Central Bank stood ready to use its "vast array of instruments" to keep short-term market interest rates low, but its policy makers had decided to keep the main refinancing rate on hold for the fifth consecutive month. The bank is divided on whether it should further loosen monetary policy as the eurozone lurches out of recession amid high unemployment and low growth. The ECB's interest rate is already at a record low but inflation is falling well short of the bank's 2 per cent target, which, over time, would force it to cut further. "We view this recovery as weak, as fragile, as uneven," the ECB president said after the 23-person governing council met in Paris for one of its two annual meetings outside Frankfurt. He also said the US budget shutdown would represent a risk to the world economy if it were protracted, but added that his impression was that it would not be. While the bank reiterated its "forward guidance" policy that promises to keep rates at or below current levels for an extended period, the council remained divided, for the second month in a row, over whether it should cut further. "Some governors observed that improvements in the economy would not justify this discussion but other governors believe the discussion is warranted," said Mr Draghi, who has only recently started to give such details about the confidential meetings. Against the backdrop of that split, debate has focused on tackling short-term interest rates that banks charge to each other, which have risen in recent months, even as the ECB has kept its main refinancing rate on hold at 0.5 per cent. Mr Draghi last week singled out long-term refinancing operations (LTRO) - as €1tn in two sets of cheap three-year loans to banks made in 2011 and 2012 were known - as an instrument that could be used again "if needed." He repeated that on Wednesday, which, along with the survival of Italian government in a confidence vote, sent the euro to a nine-month high of €1.3608 against the dollar. From a low of 0.128 per cent last December, the three-month Euribor index - the average rate at which European banks can borrow three-month money - has edged up to 0.225 per cent. Inflation, meanwhile, has slowed to 1.1 per cent in September from 1.3 per cent in August, well short of the bank's medium-term "close to but below" 2 per cent target. Mr Draghi nonetheless said inflation expectations were "firmly anchored" - code for within the tolerances the bank will accept. "With the recovery at best shaky and inflation likely to hover a little longer at levels below the ECB's target, it is obvious that a tightening of monetary policy is still a long time away from now," said Peter Vanden Houte, economist at ING. While the probability of a further rate cut has clearly diminished during the past few months, a new LTRO still looks a sure bet. There is also a wider question related to bank liquidity: to what extent such measures reach the real economy in the form of lending to companies that can use financing to expand their businesses and take on more staff. Mr Draghi said that lower levels of excess liquidity in the banking system, which is associated with the higher short-term interest rates that might trigger another LTRO, could also indicate a lessening of so-called financial fragmentation - the divergent real-world interest rates that businesses pay across the eurozone. "The excess liquidity figure depends on several factors, one of which is the state of fragmentation," he said. The greater the fragmentation, the higher the excess liquidity. However, the latest statistics on loans typically used by job-creating small and medium-sized businesses, released earlier on Wednesday by the ECB, showed the divergences, which opened up in mid-2010, remained very wide. A Spanish company borrowing up to €1m for one to five years typically pays two percentage points more in interest than a French one. Additional reporting by Megan Murphy and Michael Hunter in London