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04 October 2012

Reuters: ECB seen keeping interest rates on hold


The European Central Bank is expected to hold interest rates to allow time for new details to emerge on the health of the eurozone economy and for Spain to ask for aid.

If Spain asks other eurozone members to rescue its economy, that would clear the way for the ECB to start buying government bonds in a new programme aimed at reducing borrowing costs and solving the region's debt crisis. The ECB's main refinancing rate is already at a record low of 0.75 per cent and analysts expect it to save any rate cut until the new bond program has started.

Some expect the ECB to cut the refinancing rate to 0.5 per cent by the year end however, so economists will be eager to see if Draghi drops any hints. That would also raise questions about a deposit rate cut. It stands at zero so that would take it into negative territory. The ECB would then effectively charge banks to hold their money overnight but some policymakers, including Austria's central bank governor Ewald Nowotny, say this would create problems.

The ECB said last month it would buy short-term debt of struggling eurozone countries such as Spain in return for commitments to reform. The news calmed financial markets but investors are keen to see how the programme works in practice.

Draghi has stressed that it is up to governments to take decisive action, but he will nonetheless be quizzed on his assessment of the current negotiations on Spain.

Full article



© Reuters


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