Business

Monday February 6, 2012

Analysts: ECB to bide its time on rates this week


FRANKFURT: The European Central Bank (ECB), after two rate cuts and a series of unprecedented liquidity measures, will hold its fire this month, as it assesses the impact of those previous measures, analysts say.

The recent raft of economic data, notably in Europe's economic powerhouse Germany, has been surprisingly positive, so the bank at its meeting on Thursday looks set to wait and see how its past moves to prevent a credit crunch and boost the economy in the 17 countries are actually panning out.

In December, the ECB brought eurozone borrowing costs back down to their previous historical low of 1%, effectively reversing last year's two earlier rate hikes.

On top of that, it offered banks in the region an unlimited pool of liquidity by loosening collateral rules, cutting the minimum reserve ratio and launching new three-year loans at super-cheap rates. With a second such bond auction scheduled at the end of February, “the ECB seems happy to wait and see how these measures unfold,” said Commerzbank economist Michael Schubert.

Last month, ECB chief Mario Draghi insisted the liquidity measures were proving effective in tackling the debt crisis. But so far, banks appear to be sitting on the unprecedented 489 billion euros (US$643bil) that the ECB pumped into the system, instead of lending it out to households and businesses as the central bank had hoped. Banks' deposits with the ECB's overnight facility have soared to record highs in recent weeks and, in its latest regular quarterly bank lending survey, the ECB found that banks have tightened credit conditions for both households and businesses even as demand for loans is falling.

Nevertheless, analysts say the data do not fully take into account the ECB's liquidity measures. - AFP

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