Published December 06, 2012
FRANKFURT – The European Central Bank held interest rates at a record low of 0.75 percent on Thursday, leaving investors to shift their attention to new economic forecasts for clues about possible cuts next year.
ECB President Mario Draghi is expected to present a downward revision of the bank's staff projections at his news conference, due to start at 1330 GMT. The projections will also include the first forecasts for 2014.
The Governing Council's decision to leave its main interest rate unchanged matched economists' expectations in a Reuters poll, which also showed opinion was split down the middle over the chances of a cut early next year.
The euro held steady after the decision was announced.
The ECB's economic assessment will be analysed carefully, not only to sketch out a future interest rate path but also for other measures that could help revive the debt-stricken south of the euro zone.
"It will be interesting and important to look at how they see the risks of the economic outlook," said Nick Matthews, economist at Nomura.
"Our baseline is that they keep them to the downside, but any change to that stance -- so if they move to something more balanced or even 'slightly tilted to the downside' -- would signal increased confidence from the ECB," said Matthews, who expects a rate cut in March next year.
While financial markets have calmed since the EU and the International Monetary Fund put in place further steps to help Greece, and the ECB promised to do what it takes to preserve the euro, the bloc's economy has sunk into recession from which it shows few signs of emerging soon.
But recent policymakers' comments have suggested the ECB is unlikely to cut rates further in the near future and the central bank is wary of taking any action that could see the bloc's governments soft-pedal on budget consolidation efforts.
Also, market interest rates vary greatly across the 17-country bloc and the ECB is focused on fixing what it calls the 'transmission mechanism' for passing on its rates to all corners of the euro area before contemplating lowering official borrowing costs.
WAITING FOR SPAIN
The most obvious mechanism for doing that would be the ECB's yet to be used new bond-buying scheme, which could drive down government borrowing costs.
The ECB has not yet bought any sovereign debt under its new programme -- dubbed Outright Monetary Transactions (OMT) -- because Spain, which is seen as most likely to become the first country to make use of the new support measure, has not yet fulfilled the precondition of asking for help from the euro zone's rescue fund.
Pressure for the ECB to intervene is building.
Spain auctioned fewer bonds than it hoped to on Wednesday as investors fret over the timing of an expected aid request by the government.
However, yields fell from previous sales, reflecting a recent rally in prices since Draghi unveiled the bond plan.
With banks still wary of lending to each other, the ECB is widely expected to extend its policy of offering banks unlimited amounts of cash in all its refinancing operations, which it started doing after the collapse of Lehman Brothers in 2008.
"We are expecting them to extend the fixed rate, full allotment procedure for a further six months," Matthews said, adding there was a risk of a shorter, three months extension.