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European Central Bank

The European Central Bank was established by the Treaty of Amsterdam in 1998 and is headquartered in Frankfurt, Germany. The objective of the bank is to maintain price stability within the euro zone. The president of the ECB is Mario Draghi, former governor of the Bank of Italy.

BusinessEconomy

ECB holds key rates steady

PUBLISHED : Thursday, 04 October, 2012, 8:41pm
UPDATED : Thursday, 29 August, 2013, 4:13am

The European Central Bank held its key interest rates at their current record low here on Thursday, and is also likely to hold fire on other key policy moves for now, analysts said.

Holding its meeting at Brdo Castle outside Ljubljana, rather than the usual venue of the ECB’s Eurotower headquarters in Frankfurt, the bank’s decision-making governing council voted to keep its key refinancing or “refi” rate at the historic low level of 0.75 per cent, as widely expected.

And after unveiling the details of a revamped bond-purchase programme just last month, which has since greatly helped to ease market tensions, ECB chief Mario Draghi is not expected to announce any more crisis-fighting measures, but insist it is now up to governments to act, analysts said.

Shortly before in London, the Bank of England also held its key interest rates unchanged.

Draghi is scheduled to explain the reasoning behind the decision at a post-meeting news conference.

But the financial markets had priced in no policy changes this month amid expectations the bank is still assessing the impact of new measures announced last month.

In September, Draghi vowed to ride to the aid of countries like Spain by buying unlimited volumes of bonds to drive down borrowing costs, sending markets soaring as investors saw a turning point in the crisis.

Nevertheless, after a period of calm, markets have suffered fresh volatility amid doubts over whether Spain will apply for a bailout necessary for ECB help and continued problems in Greece, the origin of the near three-year euro crisis.

Newedge Strategy analyst Annalisa Piazza said the decision to leave rates unchanged came as “no surprise”.

Similarly, she thought it “unlikely [that Draghi would] anticipate any change in non-standard measures”.

In particular, markets will be waiting to see whether Draghi provides any indication about the bank’s thinking on a possible bailout for Spain.

Earlier on Thursday, Spain met a key bond sale target by raising 3.99 billion euros (US$5.2 billion) at interest rates that were mostly lower.

The Treasury, which aimed to borrow three billion to four billion euros, comfortably raised the funds in an auction of two-, three- and five-year bonds, proving it can still tap the markets for financing.

Facing a recession that has left one in four workers unemployed, a bulging deficit and high borrowing costs, Spain is under rising pressure from markets and some eurozone partners to seek a sovereign bailout.

The ECB has outlined a plan to buy Spanish bonds on the open market to curb interest rates, but only if Madrid submits to strict conditions from European bailout funds.

Barclays Research analyst Julian Callow said the attention would “now shift to the press conference at which we expect... Draghi to offer some more information concerning the ECB’s prospective new bond purchase programme (Outright Monetary Transactions), possibly including the ECB’s assessment of the legal viability of this new instrument”.

In addition, the press conference “could be a good opportunity for Draghi to offer the governing council’s perspectives on other issues, such as the outlook for official interest rates, the situation in the programme countries, and on Italy and Spain”, Callow said.

Capital Economics economist Ben May said he expected Draghi to “provide a bit more detail on what exactly must be done before the ECB will make use of its OMT programme and perhaps provide greater clarity on how soon it could make bond purchases after a bail-out had been requested by a troubled government”.

The ECB chief could also “reiterate that the bank could reduce interest rates further and conduct more” liquidity-providing operations, the economist suggested.

“However, he is unlikely to signal that the ECB is prepared to undertake quantitative easing to stimulate the economy, especially given the Bundesbank’s well-publicised opposition to OMTs,” he concluded.

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