ECB Holds Rates at Record Low

The European Central Bank left interest rates unchanged on Thursday and financial markets' attention will now shift to whether the bank is ready to help Greece avoid a messy default.

The ECB left its main interest rate on hold at 1.0 percent, adopting a 'wait-and-see' mode after some recent promising economic reports suggested the euro zone may be over the worst of a winter downturn.

"This is as expected," said ING economist Carsten Brzeski.

"All eyes will be on Greece and the role of the ECB," he said of ECB President Mario Draghi's 1330 GMT news conference.

ECB policymakers remained divided on Wednesday on what contribution the bank could make to a restructuring of Greece's sovereign debt, two euro zone monetary policy sources said.

With Greek leaders failing early on Thursday to agree on reforms and austerity measures, the price of a bailout, Draghi may say little on what, if anything, the ECB is ready to do.

While the ECB has ruled out joining private creditors in voluntarily accepting a reduction in Greek bonds' value, it could send Athens, via a roundabout route, the profits from bonds it bought at below face value.

Some ECB policymakers are reluctant for the bank to show a willingness to share in the restructuring burden for fear of easing the pressure on Athens to agree spending cuts. The ECB is also prisoner to the Maastricht Treaty, which forbids the central bank from financing governments.

"The question is whether ECB independence has a price tag." said Brzeski. "I think that the ECB taking a loss is out of the question - I'm looking for this to be confirmed, and maybe opening the door to eventually not taking a profit."


With the threat of a Greek insolvency casting a long shadow across the euro zone, Draghi will not go as far as some economists and declare the crisis over, even if the bloc turns out to be over the most acute phase of its economic slump.

Since the beginning of the year, some business surveys have instilled hope that the worst of the sovereign debt crisis has blown over and the euro zone economy is perking up. But there is enough doubt to keep the ECB watchful.

European stock markets and the euro extended two months of gains on Thursday as Greece edged closer to a bailout deal and investors bet a brace of central bank meetings would offer further support for the move into riskier assets.

However, with the ECB having warned of substantial downside risks to growth and the economy only slowly pulling off the ropes, the central bank could signal further easing is underway.

A Reuters poll of economists conducted before Thursday's policy decision showed 41 of 71 respondents expected the ECB would cut by its March meeting.

Some other analysts say that as the March 8 meeting comes soon after the ECB's February 29 second three-year liquidity operation, the bank will want to wait longer than that before touching rates, which it has not previously cut below 1.0 percent.

The central bank funneled banks 489 billion euros at a first three-year ultra-cheap loan operation in December, and is expected to refrain from announcing new measures while it waits to see how the February operation goes.

Francesco Papadia, a top ECB official, said on Wednesday bank liquidity concerns had all but disappeared thanks to the ECB's December three-year loans, adding that he was tempted to declare 'mission accomplished'.

Analysts also said the central bank could relax a bit.

With unlimited central bank liquidity, the ECB has pushed overnight market rates well below its main refinancing rate and its deposit rate, currently at 0.25 percent, acts as a floor for money markets.

Were Draghi to omit the word 'substantial' from the downside risks the ECB sees, this would be taken as indicating a smaller chance of a future rate cut.

More likely is that the ECB will make few changes to the wording of its policy statement as there are mixed messages in the data, with the latest monetary figures dismal.

"While the ECB will be in 'wait and see' mode for another month, ahead of the second three-year LTRO and the updated ECB staff projections in March, we expect today's statement and press conference to leave the door open to a March rate cut, which is our baseline scenario as additional insurance is taken out against weaker growth," said RBS economist Nick Matthews.