ECB likely to hold rates steady

European Central Bank poised to hold rates steady, new personnel means surprises not ruled out



FRANKFURT (AP) -- The European Central Bank is likely to hold interest rates at its monthly meeting after two straight months of cuts, analysts believe, with some expecting Europe’s debt crisis and a deteriorating economy to push the bank soon to take its key rate below the current 1 percent level.

President Mario Draghi’s remarks at his post-decision news conference Thursday will be scrutinized for clues about how fast the bank thinks the European economy is slowing — and what further steps it might deploy against the crisis caused by too much debt in the 17 countries that use the euro as their currency.

The bank lowered its key rate by a quarter point at the November and December meetings, the first chaired by Draghi after he replaced Jean-Claude Trichet, in a move that was seen as a signal of a more flexible approach to fighting the crisis. It also made unlimited amounts of cheap, three-year loans available to banks to steady the banking system.

Economists point to recent stabilizing economic indicators as reasons the 23-member governing council might wait before cutting again. Also, they note that Draghi indicated last month that some members of the council wanted to postpone the December rate cut.

Surprise decisions, however, cannot be ruled out, especially given recent big changes in top ECB leadership.

In addition to Draghi replacing Trichet in November, former Germany deputy finance minister Joerg Asmussen and former deputy director general of the French Treasury Benoit Coeure took seats on the six-member executive board that runs the bank day to day. Additionally, the job of supervising the ECB’s staff economists last week was assigned to Belgian executive board member Peter Praet — the first time a non-German has held the post since the bank was founded in 1998.

Praet’s appointment is significant because German predecessors Otmar Issing and Juergen Stark represented their country’s conservative economics tradition stressing low inflation — and were seen as strong voices to keep rates higher.

Now economists are trying to gauge whether the bank will make more cuts in the coming months. A number think the bank could take its refinancing rate as low as 0.5 percent by the end of the first quarter. That would put it in territory now occupied by the U.S. Federal Reserve, whose key rate is 0-0.15 percent, and the Bank of England, which is also to set its rates Thursday, where the benchmark rate is 0.5 percent.

Much depends on how the bank sees the economy. Many economists predict that fourth-quarter figures will show the eurozone shrank in the last three months of the year when they are published next month. Rate cuts can spur growth by making borrowing cheaper for businesses and consumers.

Analysts at Bank of America-Merrill Lynch think sagging growth will lead the ECB to cut quickly by a quarter point both Thursday and at the February meeting to “take preventive action against economic deterioration.”

Not all agree. Marco Valli, chief eurozone economist at UniCredit, sees the refinancing rate “steady at 1 percent throughout the year.” That could change, Valli cautioned, if growth slips more sharply than expected or if market turmoil from the debt crisis increases.