ECB Keeps Rates Steady

WSJ: FRANKFURT—The European Central Bank left its interest rates unchanged Wednesday for a sixth straight month, resisting pressure to provide relief for an economy threatened with recession and from stresses spreading though the euro-zone's financial system from Spain and Greece.

Reinforcing its calls for more political action to contain the euro crisis, the ECB kept its one-week refinancing rate at a historic low of 1.0%, in line with the forecast of a majority of economists polled by Dow Jones Newswires. Expectations are mounting, however, that the central bank will lower the policy rate to a new record in the coming months.

 

Attention now turns to ECB President Mario Draghi's press conference at 12:30 GMT. Mr. Draghi is scheduled to announce the latest ECB forecasts for euro-zone economic performance and inflation for this year and 2013. A significant downward revision on either would give rise to hopes for a rate cut.

 

At its previous forecast in March, the bank lowered its growth outlook for the 17-nation currency union and raised its inflation forecast. Since then, growth prospects have deteriorated sharply while inflation expectations have eased as a result of a drop in oil prices.

 

The ECB president will be watched closely to see whether he announces further unconventional policy measures, unlikely at this time as the banking system remains awash with liquidity after the ECB's three-year loan operations. The central bank averted a credit crunch by doling out €1 trillion ($1.25 trillion) but failed to boost retail lending and bolster growth.

 

Before embarking on new moves, the ECB may want to wait for the outcome of Greece's election and for Spain to develop plans to rescue troubled banks.

 

Recent comments from various ECB executives have dampened hope for more unconventional measures. Governing Council member Ewald Nowotny said the ECB "shouldn't come up with new crisis-fighting measures every week," and executive board member Benoit Coeure said "there's nothing that the ECB can do when it comes to banks' solvency."

 

Specifically, Mr. Draghi is unlikely to announce a re-launch of the bank's bond purchase program. The ECB has already stayed out of sovereign bond markets for the last 12 weeks despite rising worries that Spain may lose access to market funding.

 

If nothing else, he will almost certainly announce an extension of the ECB's fixed-rate, full-allotment lending policy. Under that policy, the ECB satisfies any and all demand for loans against eligible collateral. Addressing the European Parliament last week, Mr. Draghi said the ECB stands ready to continue to provide solvent banks with liquidity.

 

Mr. Draghi will surely be grilled on Spain, which appears to be on the brink of asking Europe to help its enfeebled banks, and on Greece, where the June 17 vote may decide whether the country leaves the euro zone.

 

In Brussels last week, he implored European political leaders to step up efforts to resolve the region's crisis, including by establishing a banking union. His comments caused a stir, and it remains to be seen whether he will reaffirm them today.

 

As the German member of the ECB's executive board, Joerg Asmussen, put it Tuesday: "Sharing a currency is more than just drawing economic benefits; it means being part of a community with a shared destiny."

 

Write to Margit Feher