ECB Holds Rates at 1.5%

The European Central Bank kept interest rates on hold on Thursday as broadly expected and is expected to launch a set of fresh liquidity measures to help banks to weather the euro zone's worsening debt storm.

The ECB kept rates unchanged at 1.5 percent at its meeting in Berlin, the last for ECB President Jean-Claude Trichet before he hands over to Mario Draghi, currently Italy's central bank governor.

Draghi will take charge next month and despite the fast approaching changeover, he will not be sitting along side with Trichet at the news conference, which is due to start at 1230 GMT. Bundesbank President Jens Weidmann will co-chair.

The ECB's interest rate decision is in line with the results of Reuters poll of economists, in which 56 of the 76 economists questioned saw rates being left unchanged, while 20 expected a decrease.

"The ECB is now likely to prepare an interest rate cut within the next four months, by March at the latest," Berenberg Bank economist Holger Schmieding.

"Trichet will try to make it easy for Draghi ... by making it clear that rates will be cut if economic indicators worsen so that Draghi will not have to announce anything new. It would be uncomfortable for Draghi, especially being Italian, having to announce a surprise at his first meeting," Schmieding added.

The Bank of England, in contrast, grasped the nettle on Thursday, announcing it would inject 75 billion pounds more new money into the flagging UK economy.

To help banks withstand a further worsening of the European sovereign debt crisis and growing tension in the interbank market, the ECB is expected to reactivate its 12-months lending operations, last used at the end of 2009, and launch a fresh programme to buy covered bonds.

The ECB first bought covered bonds between 2009 and 2010 in a year-long, 60 billion euro programme.

"The one year tender would be appropriate," Berenberg's Schmieding said. "The current threats to Europe are at least as pronounced as they were when the ECB launched the one-year tender in mid 2009."

The deepening crisis has already forced the ECB back into emergency mode. It has reintroduced six-month euro funding, a measure it had previously mothballed, and extended limit-free funding in all its operations until at least mid-January.


Over the past couple of weeks, concern about a possible default of Greece has grown and tension is building up in the money markets as banks grow increasingly weary of lending to each others.

French-Belgian municipal lender Dexia SA became the first European bank to need to be bailed out due to debt crisis problems.

The European Union is moving closer to a coordinated recapitalisation of banks to help restore confidence in a banking sector that is increasingly shunned by investors as a result of the euro zone debt crisis.

Recent proposals to resolve the debt crisis have included the idea of turning the European Financial Stability Facility (EFSF) into a bank that can tap the ECB for funds.

While Trichet himself on Tuesday said he opposed such measures, markets will want to know the consensus ECB view as change may be afoot with Draghi set to take over as president in November.Market players will also keep a close eye on the ECB's assessment of the current situation and whether it still sees the monetary policy stance as "accommodative."

At its September meeting, the ECB changed course and put its rate hikes -- started in April -- on hold, saying euro zone inflation risks were no longer skewed to the upside, but were now "broadly balanced."

Since then, signs that the economy is stalling have grown and euro zone consumer price inflation rose unexpectedly to 3.0 percent in September -- the highest level in almost three years.