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European Central Bank Stands Pat Despite Bleak Economic Outlook

European Central Bank Stands Pat Despite Bleak Economic Outlook

The European Central Bank refused to budge on interest rates Thursday morning, despite mounting pressure to ease monetary policy in support of the region's troubled economy.

The Governing Council led by ECB President Mario Draghi kept the main refi rate unchanged at a record low 1 percent after a policy session held under tight security in Barcelona, Spain.

The decision was in line with economists' expectations. The rate on the marginal lending facility was held at 1.75 percent, while the deposit facility rate was kept at 0.25 percent.

The central bank is also likely to refrain from restarting its bond-buying program, known as the Securities Market Program, despite calls for more action amid a surge in the unemployment rate and recessions in the embattled Spain and Italy.

During the post-meeting press conference set to begin at 8.30 am ET, Draghi is likely to signal that the bank has reached its limits in fighting the crisis even as the governments are delaying their plans to reach budget goals.

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 ahead of the announcement.

"He will re-assert that the ECB will not take further steps to finance their deficits for them," she added.

ING Bank Senior Economist Carsten Brzeski thinks the situation is uncomfortable for the ECB as it may have to use bigger and bigger instruments to tackle the crisis. New Long Term Refinancing Operations could be the most, and only effective tool, even if new conflicts within the ECB are created, the economist said.

"Draghi's support of a growth compact is no escape from the fiscal compact - we see it as only a hidden distress call, stressing that neither traditional nor unconventional monetary policy can be a substitute for (or cure against) structural reforms, deleveraging and austerity," Brzeski noted.

Hard economic data since the April meeting has been disappointing and downside risks to growth have increased further. The 17-nation bloc is expected to enter a severe recession this year after contracting 0.3 percent in the fourth quarter of 2011.

Inflation continues to stay above the European Central Bank's 'below, but close to 2 percent' target, though core inflation that excludes volatile items remain low.

Policymakers met in Barcelona instead of its headquarters in Frankfurt. Spain, which faces record high unemployment in the currency bloc, tightened security as the country witnessed local protests against austerity on May 1.

The country entered a recession in the first quarter led by weak domestic demand. Standard and Poor's downgraded Spanish credit ratings by two notches last week, saying that economic contraction and the need to support banks will put the country's public finances in peril.

Spain's borrowing costs keep on rising as the economic situation worsens. The country's 10-year borrowing costs surged to over 6 percent earlier this month, close to levels widely seen as unsustainable, triggering concerns that the euro member will be forced to seek an international bailout.

by RTT Staff Writer

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