The European Central Bank (ECB) kept its main interest rates unchanged on Thursday despite mounting pressure to take greater measures to tackle falling rates of inflation.
Eurozone inflation slowed to 0.7% year-on-year in January, well below the ECB's target of just under 2%, fuelling speculation that the ECB would take action.
However, as expected by analysts, the ECB held its main rate at 0.25% and left the deposit rate it pays on bank deposits at zero. The bank also left its marginal lending facility, or emerging borrowing rate, at 0.75%.
Speaking at a press conference after the decision, President Mario Draghi denied risks of deflation but said inflation would remain low for a prolonged period of time.
Draghi said the reason for holding policy was due to the "complexity of the situation" and the ECB is awaiting more data to be released in March before deciding whether to take further action.
While consumer confidence has been improving, it is a "complex picture" because data on retail sales reflected otherwise, Draghi noted.
For that reason, Draghi said the ECB was going to be "extremely cautious on recovery because it is fragile and uneven".
He also called on euro-area governments to create labour market reforms needed to lift recovery and drive down the unemployment rate.
Capital Economics said: "We still think a small cut in interest rates, with a negative deposit rate, is the most likely next step. But if deflation dangers keep rising, the ECB may also have to re-think its ideological objections to full-blown quantitative easing. Either way, though, the central bank alone cannot solve all of the Eurozone countries' problems for them."
While Draghi remained mum on the ECB's next move, he reiterated that the monetary authority stands "ready and willing to act" if necessary to spur recovery.
He also said the ECB would continue to sterilise bond purchases carried out through the Securities Markets Programme (SMP).
"A suspension of the SMP sterilization would lead to a €175bn increase in liquidity in the Eurosystem, which in turn would push the excess liquidity to approximately €350bn, a level last seen in April 2013," Unicredit Research explained to clientes earlier on the same day.
Much of that liquidity is held in so-called 'core' countries (€65bn in Germany, €30bn in France, €8bn in Belgium and €8bn in Finland) and would likely remain there due to lenders´ still high levels of risk aversion, Unicredit further said.
On banks, Draghi put a positive spin on lending in the Eurozone. He said he was encouraged by the ECB's recent bank lending survey, which showed risk perceptions have returned to 2010 levels.
The asset quality review on Europe's biggest banks was carried out before the European Union (EU) takes over authority of lenders in the bloc.
The EU is checking that banks have enough capital to withstand another possible collapse in the banking industry.
While the asset review had a negative impact on lending in the last quarter of 2013 because banks were working to shore up balance sheets, Draghi sees it having a long-term positive impact on the sector.
"The additional steps taken to establish a banking union will help restore confidence in the financial system," he said. In turn this will boost lending, he added.
The euro rose 0.56% to $1.3609 following the news.