ECB seen keeping rates on hold, eyes on bond plan

The European Central Bank is expected to leave its key interest rate at 1 percent on Thursday as its governing council holds its first monetary policy meeting since last month’s decision to buy government bonds to ease the debt crisis.

With markets still jittery — the euro recently hit a series of four-year lows to trade below $1.19 this week — attention will turn to the press conference President Jean-Claude Trichet holds after the policy meeting.

Investors will want to hear what Trichet says about the program to buy government bonds to support and boost confidence in the European government debt market — specifically, whether it will continue and for how long.

Depending on how they are done, bond purchases by a central bank can increase the supply of money in the economy, which can both stimulate growth and cause inflation, undercutting the future value of the euro.

Trichet has said the bank’s bond move would not stoke inflation because it “sterilizes” its interventions — that is, it offsets the impact on money supply by other means. So-called quantitative easing, which the Bank of England is doing, aims to increase the amount of money in an economy to make credit more available.

The program “should not be confused with quantitative easing. In simple words: We are not printing money,” Trichet has said.

Still, the purchases are not unanimously supported by governing council members.

Italian Central Bank governor Mario Draghi has said the market intervention “will have to be discontinued as quickly as possible,” while German Bundesbank governor Axel Weber said it is “essential” that possible supportive measures be “strictly targeted and tightly controlled.”

Immediate fears of default have been averted by the European Union and International Monetary Fund’s 750 billion euro ($900 billion) package of cash and state loan guarantees to protect debt-laden countries in the 16-nation eurozone from bankruptcy. However, the impact of painful austerity measures on growth in future years has hurt the euro and raised worries of a double-dip recession.

Europe’s leaders say the euro rescue package must be backed up with drastic austerity measures to get debt under control — and shore up credibility in the fundamental rules that govern their 11-year-old currency.

Trichet has said Europe needs “the equivalent of a budgetary federation” as a watchdog over eurozone governments’ public finances.

Also weighing on the euro have been predictions that the bank will wait well into 2011 before raising its key interest rate from the current record low of 1 percent.

Those low rates can weigh on the euro’s exchange rate by reducing return on euro-denominated investments — especially if rates go up first in the United States as its economy recovers.

China Daily

Tags: bond market, global banking industry, The European Central Bank, world finance