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ECB Likely To Hold Fire

ECB Likely To Hold Fire
5/3/2012 3:54 AM ET

The European Central Bank is set to maintain its key rates at historic low as elevated inflation provides no scope for a rate cut. The central bank is also likely to refrain from restarting its bond-buying program despite calls for more action amid a surge in the unemployment rate and recessions in Spain and Italy.

The Governing Council led by ECB President Mario Draghi is expected to keep the main refi rate unchanged at a record low 1 percent. The outcome of the meeting is due at 7.45 am ET.

The above target, stubbornly high-inflation is adding to the dilemma of policymakers as a rate cut would increase inflationary pressure further. Inflation slowed slightly to 2.6 percent in April.

Additionally, the positive impact of a rate reduction on the economy would be limited. The 17-nation bloc is expected to enter a deeper recession this year after contracting 0.3 percent in the fourth quarter of 2011.

Policymakers meet in Barcelona instead of its headquarters in Frankfurt. Spain, one of the most indebted nation, has tightened security as it has witnessed local protest against austerity on May 1.

Draghi is set to hold a regular post-decision press conference at 8.30 am ET. Amid indications that commitment to austerity is waning, he is likely to call the governments to act to restore market confidence, Jennifer McKeown, an economist at Capital Economics said in a note.

Further, the ECB chief is likely to explain his growth vision, what is mentioned as "growth compact".

ING Bank's Senior Economist Carsten Brzeski said the ECB will not hesitate to intervene again should market tensions increase further. However, not all ECB tools are as sharp as they used to be.

Recently, unlimited fund offering of around EUR 1 trillion by the central bank has helped to steady confidence in financial markets after borrowing cost of Spain and Italy heightened. But such a move is not expected soon.

by RTT Staff Writer

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