ECB holds rates steady

AFP , Thursday 3 May 2012

Central bankers eurozone states vote to keep borrowing costs at 1.0 percent for the sixth month in a row

European Central Bank policymakers, meeting in Spain at the heart of the eurozone debt storm, held borrowing costs at historic lows Thursday to help keep economic growth alive.

The central bank governors of the 17 eurozone member states, convening in Barcelona's giant conference centre under tight security, voted to keep borrowing costs at 1.0 percent for the sixth month in a row.

No analysts had expected any change in rates or further anti-crisis measures this month, following a raft of recent policy steps to prop up the euro and keep the single currency area's debt-wracked economy up and running.

In December, the ECB reversed last year's rate hikes to bring eurozone borrowing costs back down to an all-time low of 1.0 percent and resumed a hotly contested programme of buying up the bonds of debt-mired countries so as to ease their borrowing costs.

Most recently, two so-called long-term refinancing operations in December and February pumped more than 1.0 trillion euros ($1.3 trillion) into the banking system in a bid to avert a dangerous credit squeeze.

An 8,000-strong security force was deployed in Barcelona for the meeting and the authorities temporarily reintroduced border controls to prevent the entry of potential trouble-makers.

There were no signs of trouble outside the meeting venue, however, where a only a small handful of banner-wielding protesters could be seen.

With unemployment running at a record 24.4 percent and the country officially back in recession, pressure for Spain to stabilise its public finances is driving spending cuts and unpopular austerity measures that are fuelling popular protests.

Nevertheless, ECB watchers believe the central bank's patience is wearing thin as a growing number of governments begin to baulk at the belt-tightening measures prescribed under the recently agreed "fiscal compact," complaining that austerity risks undercutting growth.

Analysts keenly awaited ECB president Mario Draghi's assessment of the situation at a post-meeting news conference.

"The apparent 'conflict' between fiscal austerity on one hand and economic growth on the other seems likely to feature prominently during the question and answer session," said Capital Economics economist Mark Miller.

"Attention is likely to focus on whether Draghi will give any hints that the ECB might be willing to provide further support for the region's economy."

Despite evidence that governments' commitment to austerity is waning, "we look for president Draghi to continue stressing the importance of working towards sound fiscal positions and implementing structural reforms aimed at boosting competitiveness," Miller said.

Newedge Strategy economist Annalisa Piazza said she expected Draghi to be more cautious with regard to the growth outlook and he "might sound also a touch more relaxed with regards to inflation, given the slack in the economy."

Enam Ahmed of Moody's Analytics said he expected the ECB to expand government bond purchases in the coming months and "we cannot rule out further extraordinary liquidity support to banks.

"We expect interest rates to be on hold through 2013," the economist added.

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