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PREVIEW: ECB to hold rates amid debt crisis efforts

Published: Jan 07, 2013 - 9:56 AM GMT

The European Central Bank is expected to keep interest rates at a record low of 0.75% at its Thursday's meeting in an effort to wrestle the Eurozone out of an economic slump.

epa02991006 Italian Mario Draghi, new President of the European Central Bank (ECB),  during a press conference in Frankfurt Main, Germany, 03 November 2011. The council of the ECB has surprisingly reduced the base rate to 1.25 percent.  EPA/MARC TIRL

by Eva Sjekelova
WBP Online

Frankfurt - The European Central Bank (ECB) will mark the new year with steady interest rates at its policy meeting on January 10 to keep up the pressure on governments to solve the ongoing debt crisis.

The ECB's Governing Council will try to extend the calm instilled on markets last year when ECB President Mario Draghi pledged to do "whatever it takes to preserve the euro", economists said, adding that policy makers will keep interest rates at record low of 0.75% until at least the first quarter of next year.

The central bank is probably waiting for the latest developments in the euro area amid efforts by European officials to resolve the debt crisis, analysts predicted.

"Whilst a rate cut cannot be entirely ruled out, we do not expect the Governing Council to change interest rates at its meeting on Thursday," economist at Commerzbank Michael Schubert said.

"There are so many reasons against a rate cut. First of all, it wouldn't really achieve anything; secondly, policy makers are still unsure about the impact on the deposit rate; thirdly, it looks like we are reaching the bottom in terms of the economy and the Bundesbank would never agree to it," economist Christian Schulz from Berenberg Bank in London commented.

At December's meeting, ECB President Draghi acknowledged that some members of the Governing Council had pushed for a rate cut and opened the door to such a move if conditions do not improve.

Meanwhile, markets could see some indications of stabilization in the global economy.

Positive data came from Germany, the strongest European economy, as the unemployment in the country rose less than analysts forecast in December and business confidence increased for a second month in a row after demand from outside Europe boosted factory orders and exports.

In addition, German Finance Minister Wolfgang Schaeuble said he believed the embattled euro area was now past the peak of its three-year-long debt crisis.

Yields on Spanish benchmark bonds, an indicator of the government's borrowing costs, dropped close to 5% last week, after reaching a peak of 7.566% on July 24.

Outside of Europe, US manufacturing picked up in December after reaching a three-year low, while the services industry in China grew at the fastest pace in four months.

"I remain confident that last year will go down in history as the year when it all turned. I wouldn't be surprised if this year recovery turns out somewhat stronger than expected," chief global economist at UniCredit in London Erik Nielsen wrote in a note to clients.

"We are not expecting more monetary easing from the ECB. The ECB will focus on fixing monetary transmission and hence bring easier financial conditions to the periphery, but apart from that we expect that the economy will recover during the year and thereby reduce the need for more easing," Anders Svendsen, chief analyst at Nordea Markets Research, said.

This year, European policymakers faces potential pitfalls arising from widening debt in Spain, Italy's election in February, continuing austerity in Greece, while they are also assembling a rescue package for Cyprus.

Draghi also faces the managerial challenge of building up a banking supervision that was agreed to by Eurozone finance ministers in December.

To contact the author of this story e-mail eva.sjekelova@wbponline.com

Photo: ISIFA

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