Irish Times – ECB To Hold Interest Rates Steady – 8 November 2012

(Reuters) The European Central Bank is expected to leave interest rates on hold today, waiting instead to show its mettle with a new bond-purchase programme that is ready for use as soon as Spain asks for help.

The bank said last month it was ready to buy bonds of debt-strained governments such as Spain and Italy once they had signed up to a European bailout programme.

So far no request has been made, but the announcement alone has calmed markets.

Underlying economic problems persist, however, and gloomy data indicated earlier this week that the euro zone economy risked shrinking more than expected in the fourth quarter, which the ECB could eventually respond to by cutting rates.

While a Reuters poll gave an 80 per cent chance the ECB will hold its main refinancing rate at 0.75 per cent today, most of the 73 analysts polled expected it will be cut to a new record low of 0.5 per cent within the next few months.

“We expect the ECB to remain firmly on hold,” said Goldman Sachs economist Dirk Schumacher.

“Neither the data that have become available since last month nor actions from euro area governments justify additional measures at this point.”

Before cutting rates further, the ECB will focus on making sure that its record low rates reach companies and households across the euro zone, a mechanism that has been broken by the debt crisis.

The new bond-purchase plan – dubbed Outright Monetary Transactions (OMT) – is the ECB’s designated tool to fix this mechanism. It just needs to be activated and that can only be done by the respective governments requesting a bailout. linkto original article

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