ECB holds rates, Draghi eyed on Spain
BRDO PRI KRANJU, Slovenia (Reuters) - The European Central Bank kept its interest rates on hold on Thursday as markets awaited signals from its President Mario Draghi about when he might pull the trigger on his new bond-buying plan.
A month after Draghi unveiled a bond-purchase program for struggling euro states that was hailed by many as a savior for the single currency bloc, investors are still waiting for Spain to bite the bullet and request a formal rescue.
Before it does, the ECB cannot act, and markets are likely to remain jittery. Spanish two-year note yields have climbed more than half a percentage point in the weeks since Draghi's plan was unveiled - a reminder that action not words are needed to resolve euro zone's three-year old crisis.
"Draghi will be careful, but he will put a little more pressure on Spain to ask for support, given that if that doesn't happen, market turmoil, market volatility could increase again," said Elwin de Groot of Rabobank.
Before the Italian ECB president's 1230 GMT news conference, the central bank announced that its governing council had decided to keep its main refinancing rate steady at 0.75 percent, a record low.
Analysts expect the bank to cut rates later this year, but only after the new bond program has started.
Annual inflation in the euro zone stood at 2.7 percent in September, the 22nd straight month that it has been above the ECB's target of just below 2 percent. This has limited its room to act on rates, even as the currency bloc risks returning to recession in the third quarter.
The rate decision was in line with expectations -- a majority of 73 economists polled by Reuters had expected no change on Thursday from the council meeting in Slovenia, one of two the bank holds annually away from its Frankfurt base.
Purchasing managers data on Wednesday showed companies face dwindling orders and faster layoffs, increasing worries about the economy.
Moreover, the ECB has said its 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 program will reduce borrowing costs.
Since announcing his plan to buy the short-term debt of struggling euro zone countries to reduce their borrowing costs, Draghi has stressed repeatedly that it is up to governments to take action.
At the news conference he will be quizzed on his assessment of the current negotiations with Spain, which has announced new budget measures in recent weeks to try to regain the confidence of markets.
Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Spanish Prime Minister Mariano Rajoy has resisted a formal aid request, in part because Germany opposes it, sources told Reuters this week.
He is also worried about the perception that Spain's policies are being dictated from abroad, although analysts said the ECB was unlikely to attach stricter conditions to any bond-buying than those set by the EU and the IMF.
"The ECB will not be setting additional conditionality, you cannot reasonably expect it to do that," said Unicredit economist Marco Valli, who believes Spain will apply for aid after local elections later this month.
(Editing by Noah Barkin/Jeremy Gaunt)
The European Central Bank kept its interest rates on hold on Thursday as markets awaited signals from its President Mario Draghi about when he might pull the trigger on his new bond-buying plan.
A month after Draghi unveiled a bond-purchase program for struggling euro states that was hailed by many as a savior for the single currency bloc, investors are still waiting for Spain to bite the bullet and request a formal rescue.
Before it does, the ECB cannot act, and markets are likely to remain jittery. Spanish two-year note yields have climbed more than half a percentage point in the weeks since Draghi's plan was unveiled - a reminder that action not words are needed to resolve euro zone's three-year old crisis.
"Draghi will be careful, but he will put a little more pressure on Spain to ask for support, given that if that doesn't happen, market turmoil, market volatility could increase again," said Elwin de Groot of Rabobank.
Before the Italian ECB president's 1230 GMT news conference, the central bank announced that its governing council had decided to keep its main refinancing rate steady at 0.75 percent, a record low.
Analysts expect the bank to cut rates later this year, but only after the new bond program has started.
Annual inflation in the euro zone stood at 2.7 percent in September, the 22nd straight month that it has been above the ECB's target of just below 2 percent. This has limited its room to act on rates, even as the currency bloc risks returning to recession in the third quarter.
The rate decision was in line with expectations -- a majority of 73 economists polled by Reuters had expected no change on Thursday from the council meeting in Slovenia, one of two the bank holds annually away from its Frankfurt base.
Purchasing managers data on Wednesday showed companies face dwindling orders and faster layoffs, increasing worries about the economy.
Moreover, the ECB has said its 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 program will reduce borrowing costs.
Since announcing his plan to buy the short-term debt of struggling euro zone countries to reduce their borrowing costs, Draghi has stressed repeatedly that it is up to governments to take action.
At the news conference he will be quizzed on his assessment of the current negotiations with Spain, which has announced new budget measures in recent weeks to try to regain the confidence of markets.
Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Spanish Prime Minister Mariano Rajoy has resisted a formal aid request, in part because Germany opposes it, sources told Reuters this week.
He is also worried about the perception that Spain's policies are being dictated from abroad, although analysts said the ECB was unlikely to attach stricter conditions to any bond-buying than those set by the EU and the IMF.
"The ECB will not be setting additional conditionality, you cannot reasonably expect it to do that," said Unicredit economist Marco Valli, who believes Spain will apply for aid after local elections later this month.
(Editing by Noah Barkin/Jeremy Gaunt)