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ECB Stays Pat For Third Month Amid Uncertain Spain Bailout

October 4, 2012 RTTnews
The European Central Bank adopted a wait-and-watch stance on Thursday while leaving euro area interest rates unchanged, amid uncertainty regarding a Spanish request for bailout and its fallout.

The central bank of 17 nations held the refinancing rate unchanged at 0.75 percent for a third consecutive month, following the Governing Council meeting in Ljubljana, the capital of Slovenia.

The decision was in line with economists' expectations. The central bank also kept its deposit rate at zero and the marginal lending facility rate at 1.50 percent.

"Despite market cheerfulness about the OMT, latest developments have been a rude reminder that preventing the Eurozone from falling apart will not necessarily restore growth quickly," ING Bank Senior Economist Carsten Brzeski said.

As any surprises are unlikely, analysts expect ECB President Mario Draghi to detail the Outright Monetary Transactions (OMT) programme, unveiled last month, during his regular post-meeting press conference due to begin at 8.30 am ET.

"While President Draghi may clarify what the ECB will require before it will undertake OMTs, he is unlikely to provide any clear indication of the likely scale of bond purchases if/when Spain seeks outside assistance," Capital Economics European Economist Ben May said last week.

Draghi's September announcement that ECB would make unlimited purchases of government bonds helped boost investor sentiment and markedly brought down the borrowing costs of Italy and Spain.

However, the ECB will make such a bond market intervention only if a struggling country makes a request for aid from the EU and IMF. The lingering uncertainty over Spain's bailout request pushed the country's bond yields above 6 percent last week.

Earlier today, Spain raised nearly EUR 4 billion from the sale of its medium-term debt. The auction saw an improvement in investor demand, but the yield on the benchmark three-year bond increased.

Prime Minister Mariano Rajoy's government is hesitating to place a request to the EU and IMF for aid due to concerns over the tough austerity measures such a rescue would entail. Meanwhile, Germany has voiced its opposition to any such request.

On the macroeconomic front, there is less room for optimism for the ECB. Energy costs have pushed up both consumer prices as well as producer prices.

Headline inflation rose to six-month high of 2.7 percent in September, far above the central bank's target of 'below, but close to 2 percent'. In August, pipeline inflation was the highest since January.

The 17-nation economy shrank 0.2 percent in the second quarter, following stagnation in the first three months of the year. The unemployment rate held steady at a record high 11.4 percent in August and the jobless total was a record 18.196 million.

Recent ECB rhetoric have shown mixed views regarding the future course of action. Executive Board member Benoit Coeure said recently that the bank is unlikely to cut interest rates given the outlook for high inflation and weak growth.

Meanwhile, Governing Council member Luc Coene said last month that the central bank has a number of options to ease policy, including cutting deposit rate below zero and offering more cheap loans to banks.

"We would not rule out the Bank adopting measures to encourage commercial banks to lend to the wider economy," May at Capital Economics said.