GO
Loading...

UPDATE 1-ECB seen keeping interest rates on hold

Thursday, 4 Oct 2012 | 3:21 AM ET

* ECB rate decision due at 1145 GMT, news conference 1230

* ECB expected to hold rates at 0.75 pct

* Draghi to be questioned on Spanish bailout negotiation

(Updates with meeting started)

By Eva Kuehnen

BRDO PRI KRANJU, Slovenia, Oct 4 (Reuters) - The European Central Bank is expected to hold interest rates when it meets on Thursday to allow time for new details to emerge on the health of the euro zone economy and for Spain to ask for aid.

If Spain asks other euro zone 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 percent and analysts expect it to save any rate cut until the new bond programme has started.

Economic reports do not make a clear case for lower interest rates either. While they signal that the euro zone returned to recession in the third quarter, inflation remains high.

The majority of 73 economists polled by Reuters said they expected no change on Thursday, when the Governing Council meets near Ljubljana in one of two annual meetings away from its Frankfurt base.

"We do not expect the Governing Council to cut interest rates at this meeting. We believe that only cutting the main refinancing rate would be little more than a gesture," Royal Bank of Scotland economist Richard Barwell said in a note.

The ECB meeting got under way at around 0700 GMT. The rate decision is due at 1145 GMT with President Mario Draghi's news conference at 1230.

ECB Executive Board member Benoit Coeure said last week that economic and inflation data did not justify an October cut - a view echoed by Austria's central bank governor Ewald Nowotny.

Wednesday's purchasing managers indexes (PMIs) showed companies faced dwindling orders and faster layoffs. But consumer prices rose at an annual rate of 2.7 percent in September, the 22nd month that inflation has been above the ECB's target of just below 2 percent, limiting its room to act.

The ECB has also said its record-low interest rates are not filtering through to households and companies, especially in troubled southern Europe where lending rates are much higher.

It hopes the new bond programme will reduce borrowing costs. LOOKING FOR HINTS

A small majority in the Reuters poll expect the ECB to cut the refinancing rate to 0.5 percent 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 Nowotny, say this would create problems.

"We have already seen quite a lot of decisions outside the box, yet another measure outside the box before we have seen any implementation of what is already on the table might create more confusion than benefit for the market," G+ Economics' Lena Komileva said.

The ECB said last month it would buy short-term debt of struggling euro zone 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.

He has to stick to his promise to help the euro zone despite criticism from the German Bundesbank which says the new programme is close to breaking the rule banning the ECB from financing governments.

"Given that the ECB's actions are hostage to the political debate, in particular the EU/Spain dialogue on Spain's request for EFSF aid, some news that Mr. Draghi himself is encouraged by developments will go a very long way to provide support to the market," said G+ Economics' Komileva.

(Editing by Anna Willard)

((eva.kuehnen@thomsonreuters.com)(49 69 75651244)(Reuters Messaging: eva.kuehnen.thomsonreuters.com@reuters.net))

Keywords: ECB/RATES