ECB keeps rates at 1 pct, to face crisis grilling

FRANKFURT: The European Central Bank will face a grilling on its assessment of the euro zone debt crisis and firming price pressures in the bloc after it left interest rates on hold at 1 percent on Thursday.

The decision was correctly forecast by all economists polled by Reuters and keeps rates at the record low they have been at since May 2009.

Financial markets wonder whether the ECB can increase its bond purchases to support Portugal -- the latest government under pressure in a crisis which policymakers want to halt before it reaches the much bigger Spanish economy.

The pressure on the ECB to buy bonds may be eased by Portugal's success in an auction of its benchmark 10-year bond on Wednesday, a similarly solid debt sale by Spain on Thursday and a call from the EU's top economic official for a stronger European financial safety net.

"It will be interesting to see any reaction to that," RBS economist Nick Matthews said of the safety net discussion.

"I think probably the fact that you've got the sovereign debt crisis still going on and the focus on Portugal suggests to us that you're still going to have the ECB talking about uncertainty remaining elevated," he added.

ECB buying of Portuguese bonds has bought Lisbon time and although it got through Wednesday's auction unscathed, markets still have concerns about Portugal's ability to finance itself.

The ECB is likely to give few indications about the future volume of its bond buys, keeping the onus on governments to deal with the problem.

The purchasing programme, which has left the ECB exposed to potential losses, has divided opinion within the bank, with Germany's Bundesbank chief Axel Weber voicing his opposition publicly.

"It is not in the ECB's interest to make any disclosure/commitment on the Securities Markets Program," UniCredit economist Marco Valli wrote in a research note.

"Trichet should limit himself to stating that the programme is ongoing and will be adjusted as needed," he added.

Keeping its bond buying plans ambiguous affords the ECB an element of surprise when it acts, generating more impact.

INFLATION MONITORING

Thursday's policy meeting is the first since Estonia joined the currency bloc on Jan. 1, bringing its membership to 17 countries. Trichet and ECB Vice President Vitor Constancio will hold a news conference at 1330 GMT.

Questions will also focus on last month's jump in euro zone inflation to 2.2 percent -- the first time in two years that it has risen above the bank's target of just below 2 percent.

"I think the ECB has to acknowledge that there is an upside risk in the short term and inflation is likely to be going higher in the next couple of months but I think overall the risks to the outlook for price developments are likely to remain broadly balanced," Matthews said.

Several countries are already raising rates. South Korea and Thailand were the latest Asian economies this week to hike by another 25 basis points as policymakers battle the impact of surging prices of food and other commodities.

Posted in: The Economic Times