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ECB holds interest rate at 0.75%

Source : BUSINESS_STANDARD
Last Updated: Thu, Nov 08, 2012 19:31 hrs

The European Central Bank held its main interest rate at 0.75 per cent on Thursday, deferring any cut in borrowing costs while it assesses the extent of the Euro zone's economic downturn and waits for a cue to use its new bond-purchase programme.

The bank has said it was ready to buy bonds of debt-strained governments such as Spain and Italy once they had signed up to a European bailout programme. So far no request has been made, but the announcement alone has calmed markets.

"This is as expected," JP Morgan economist Greg Fuzesi said of the rate decision. "They hadn't signaled any rate move for this meeting."

A Reuters poll had given an 80 per cent chance the European Central Bank would hold its main refinancing rate, but most of the 73 analysts polled expected it will be cut to a new record low of 0.5 per cent within the next few months. Gloomy data this week indicated the Euro zone economy may shrink in the fourth quarter, which the ECB could eventually respond to by cutting rates.

Draghi himself gave a notably downbeat assessment of the economy on Wednesday.

"Unemployment is deplorably high," he said in a speech to German bankers. "Overall economic activity is weak and it is expected to remain weak in the near term. And the growth of money and credit are subdued."

Before making any decision to cut rates further, the European Central Bank will focus on making sure that its record low rates reach companies and households across the Euro zone, a mechanism that has been broken by the debt crisis.

The new bond-purchase plan — dubbed Outright Monetary Transactions (OMT) — is the European Central Bank's designated tool but it can only be activated once a Euro zone government requests help from the bloc's rescue fund.

Investors and Euro zone policymakers have been urging Spain to seek aid but Spanish Prime Minister Mariano Rajoy has so far avoided seeking help, saying he wants assurances ECB intervention would bring down Spain's debt costs.

Spain sold Euro 4.8 billion of debt including its first longer-term issue in 18 months on Thursday, enough to complete its 2012 financing programme and begin raising funds for next year, so there is little immediate pressure on that front.

Yields on Spanish government bonds have dropped by around 2 percentage points since Draghi said in late July the ECB was ready to do "whatever it takes to preserve the euro" — a pledge that heralded the bond-buy plan.

Some economists have now raised the possibility that the OMT might never have to be activated considering its impact so far.

But Matteo Cominetta, European economist at UBS, said it would eventually be put to the test because of the large amount of Spanish sovereign debt coming up for renewal next year, roughly Euro 140 billion according to Reuters data.

"Next year, you will have a record supply of Spanish bonds up for renewal in a situation where macro economic data will remain very bad for a long time in Spain," Cominetta said.

The European Commission said in its autumn forecasts on Wednesday that Spain would suffer a recession almost three times deeper at 1.4 per cent in 2013 than the 0.5 per cent contraction predicted by Madrid, and said it would miss its deficit targets too.

The Commission also said the Euro zone economy would barely grow next year, but pick up in 2014.




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