Mon, Dec 05, 2011 - Page 1 News List

ECB set to cut key rates again

AFP, FRANKFURT, GERMANY

The European Central Bank (ECB) is expected to cut its key interest rates for the second time in two months this week as EU leaders battle to find a solution to the long-running debt crisis.

The ECB’s decisionmaking governing council is holding its last monthly interest-rate meeting this year on Thursday, the same day as EU leaders gather in Brussels to find ways out of a crisis that is threatening the very existence of the single currency.

Many governments and analysts see the ECB as the sole institution capable of putting out the fires of the crisis in the immediate term.

However, new ECB President Mario Draghi has repeatedly stressed its fire-fighting role is only temporary and it is ultimately up to member countries themselves to get their finances in order.

Draghi surprised the markets when he took over at the ECB’s helm only last month with an immediate quarter-point reduction in borrowing costs as the 17 countries that share the euro teeter on the brink of a new recession.

Markets and ECB watchers are penciling in a similar move again this month, bringing borrowing costs in the euro area down to just 1 percent.

While Marco Valli at UniCredit said such a move was “not a foregone conclusion, because in the past the ECB rarely moved at two consecutive meetings without facing a major shock ... our view is that, under current circumstances, there is not much merit in delaying rate action.”

With the ECB’s latest staff economic projections, also scheduled for publication on Thursday, expected to be revised downwards significantly, the bank will have ample arguments to justify a further rate cut, Commerzbank economists Michael Schubert and Ralph Solveen said.

This “should prompt the ECB to cut its refi [refinancing] rate from currently 1.25 percent to 1 percent,” they said.

Thus, with such a move already widely priced in, the focus of attention will be on the so-called “unconventional measures” that Draghi will announce to try and get the crisis under control, analysts said.

Tensions in the sovereign bank markets appear to have eased slightly in the last few days.

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