Tuesday 21 November 2017

ECB leaves interest rates at 0.75pc as expected

`Eva Kuehnen

THE European Central Bank kept its interest rates on hold at 0.75pc 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 programme for struggling euro states that was hailed by many as a saviour 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 0.75percent, a record low.

Analysts expect the bank to cut rates later this year, but only after the new bond programme has started. Annual inflation in the euro zone stood at 2.7pc in September, the 22nd straight month that it has been above the ECB's target of just below 2pc. 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 programme will reduce borrowing costs.

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