European Central Bank (ECB) will maintain the key interest rate to 1% Thursday and will continue to assess the effect of over €1,000 billion pumped in the banking system, analysts for CNBC said, warning that the ECB is exhausting its capacity to combat the debt crisis. Loans in December and February that ECB used to finance banks with over €1,000 billion have been well received by many analysts, who believed that European banks have stabilized the European banking system and prevented a credit crunch.
“Recent economic data are mixed, but not so weak as to cause a further reduction of interest. ECB remains in the “wait and see” mode, as it is assessing the impact of the longer-term refinancing operations,” said analysts of Danske Bank. Inflation remains high, due to advances in energy prices and it also reduces the likelihood of a decrease in interest. However, financial markets will pay close attention to comments from ECB’s president, Mario Draghi, for clues on further measures to stimulate economic growth in the eurozone.
Improving economic indicators earlier this year is a sign of new hopes that the eurozone is getting out of recession, but more recent data might show that eight countries in the monetary union are in recession, while others have a weak growth.
Economic problems have led many politicians to demand more focus on growth and not just austerity.
Draghi spoke about a “growth pact” to complement the fiscal treaty signed by most EU countries in March. The agreement calls for maintaining budget deficits under control, but critics say that the use of fiscal austerity during a recession worsens the crisis. The emphasis on growth has triggered speculation about a possible reduction in lending rates in June, but analysts from Danske Bank disagree. “We do not share this interpretation. In our opinion, Draghi’s focus on growth is a hint to the political leaders of the euro area the ECB will support public investment in infrastructure projects. In recent days it was suggested that these projects could be financed through European Investment Bank,” according to the Danske Bank.
Strong growth in bond yields in the countries at the periphery of eurozone, especially in Spain, after the S & P downgraded the country’s rating for the second time this year, have left investors wondering whether the ECB will intervene to calm the market. “In our opinion, the ECB will not hesitate to intervene again if the tensions on the market will become stronger. However, not all weapons ECB are as sharp as they once were,” said ING analyst Carsten Brzeski. The analyst believes that new long-term refinance operations would be the only effective instrument of the ECB, even if it will create dissension in bank’s management. Danske Bank analysts said however that the auction for three-year unlimited funds held in February has ended the monetary relaxation.
German Chancellor Angela Merkel has maintained her opposition to ECB’s new measures to stimulate the economy as decisions to date have generated tensions in bank’s management, writes CNBC. Recently, the chancellor said, however, that Germany agrees to increase European Investment Bank’ resources to combat the crisis.
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