The European Central Bank on Thursday decided to retain its interest rate at a record low amid the bloc going through an unresolved debt crisis and economic downturn.
At the meeting in Frankfurt, the central bank to the 17 nation currency bloc left its benchmark interest rate, known as the refi, unchanged at 0.75 percent. The decision was in line with economists' expectations.
Last month, the bank cut the rate by a quarter-point, the third reduction since Mario Draghi took over as the ECB chief in November. The cut took the refi rate below 1 percent for the first time in ECB's history.
The central bank retained its deposit rate at zero and the marginal lending facility rate at 1.50 percent. The bank has lowered these rates by 25 basis points in July.
According to the results of recent surveys, the economy is falling into a recession. The latest Purchasing Managers' survey showed that the downturn in the Eurozone manufacturing sector gathered momentum at the start of the third quarter, as activity fell to a 37-month low in July.
Draghi pledged last Thursday that "Within our mandate, ECB is ready to do whatever it takes to defend the euro". And that will be enough, he added. Germany, France and Italy have also voiced their support to protect the euro.
Draghi's assurance last Thursday is seen as a signal that the central bank may consider resuming purchases of government bonds. But economists now expect the ECB to disappoint the markets.
There is a clear risk of disappointment - perhaps prompting a renewed rise in peripheral bond yields and fall in the euro exchange rate before long, Jennifer McKeown at Capital Economics said.
The ECB bond-buying scheme known as the Securities Market Programme was suspended in March. It is also speculated that the bank would propose that the Eurozone permanent bailout fund, the ESM, must be allowed to buy bonds of troubled euro nations.
Bundesbank President Jens Weidmann, who is a strong critic of ECB's bond purchases, said in an interview published on Wednesday that the ECB must not exceed its mandate to fight inflation.
ECB Governing Council Member Ewald Nowotny said on July 25 that there are arguments in favor of providing a banking license to the Eurozone's permanent bailout fund, the European Stability Mechanism. A banking license will give the ESM an access to ECB lending.
Today, Italian Prime Minister Mario Monti said he expects the permanent bailout fund to get a banking license in the due course. "I think this will help, I think this will in due course occur," he told reporters. However, the German and Finnish government strongly oppose granting banking license to ESM.
Elsewhere, Spain successfully raised EUR 3.13 billion from the debt auction, but at higher costs. It sold more than the maximum target of EUR 3 billion.
ECB President will begin the regular post-decision press conference at 8.30 am ET.
by RTT Staff Writer
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