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ECB Holds Fire As Crisis Re-emergence Threat Looms

ECB Holds Fire As Crisis Re-emergence Threat Looms
7/4/2013 8:35 AM ET

The European Central Bank left its key interest rate unchanged on Thursday for the second consecutive month in the backdrop of the looming threat of a re-emergence of the eurozone crisis and the market turbulence following the U.S. Federal Reserve's signal that it may wind up policy stimulus soon.

The Governing Council led by ECB President Mario Draghi kept the main refinancing rate steady at a record low 0.50 percent as expected. In May, the rate was slashed by quarter-basis point, the first rate cut in nine months.

The bank also maintained the marginal lending facility rate at 1 percent for a second month, following a 50 basis points cut in May. The zero deposit rate was also left unchanged.

ECB Chief Draghi is set to hold the post meeting press conference at 8.30 am ET when he is expected to reassure markets about the accommodative stance of the bank's monetary policy. Markets were rattled after the U.S. Federal Reserve last month signaled that it is getting ready to end stimulus for the economy.

Further, he is also expected to address the political crisis in Portugal this week, which send the country's bond yields above 8 percent, and the uncertain fate of aid disbursement to Greece.

The ECB's decision to hold its main refinancing rate today was wholly expected, given the recent modest improvement in some euro-zone activity indicators, Capital Economics Economist Jonathan Loynes said.

Recent data showed that consumer spending has rebounded in the region and the contraction in the private sector activity eased. Inflation picked up in June on the back of rising energy costs. Meanwhile, unemployment rose again in May to set a new record of 12.2 percent.

"The key question now is whether President Draghi will join the Fed and the Bank of England in providing some form of forward guidance on policy in order to prevent the recent rise in market rates and bond yields from snuffing out the nascent recovery," Loynes said.

"Rather stronger guidance - either on the future path of interest rates or on the likely implementation of OMTs - may well be needed to prevent market pressures from rising further."

Earlier today, the Bank of England, which held the first rate setting session under its new Governor Mark Carney, initiated the process towards providing interest rate guidance. The central bank noted that the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.

Further, the U.K. central bank signaled guidance on future interest rates, most likely in August.

"The ECB remains in crisis mode," ING Bank Economist Carsten Brzeski said earlier this week.

"The Eurozone economy is still lagging far behind the U.S. economy and exit discussions at a moment in which the economy is showing that signs of a bottoming out are more than premature."

Chances of an additional rate cut if the euro area economy fails to recover are still much higher than any imminent end to loose monetary policy, Brzeski added.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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