ECB set to hold fire on rates, eyes risks from Ukraine conflict

Thu Aug 7, 2014 2:49am EDT
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By Eva Taylor

FRANKFURT (Reuters) - The European Central Bank is set to hold fire on rates on Thursday as it waits for earlier stimulus measures to gain traction, while keeping an eye on emerging risks from the conflict in Ukraine.

The ECB cut interest rates to record lows in June, became the first major central bank to charge banks for holding their deposits overnight and launched a new ultra-cheap, four-year loan program, dubbed TLTROs, to be rolled out later this year.

"After the fireworks in June, it is not the time to take fresh measures because the ECB wants to wait and see how things develop," said Reinhard Cluse, economist at UBS. "The ECB wants to keep its powder dry."

None of the 64 economists in a Reuters poll expect any change to the refinancing or deposit rates when the Governing Council meets on Thursday.

ECB President Mario Draghi is likely to put more emphasis on the geopolitical risks to the euro zone growth outlook after the European Union stepped up sanctions against Russia for its role in Ukraine's political crisis, which has already hit confidence.

Although all but two of 36 economists in a separate poll said there was a low risk of any negative impact on the euro zone economy from the U.S. and EU sanctions on Russia, they come at a time when key countries are struggling to return to growth.

Italy, the euro zone's third largest economy, slipped back into recession in the second quarter. Prime Minister Matteo Renzi has led calls to move from austerity to looser EU budget rules, but has been rebuffed by Germany, Europe's economic powerhouse, and some others.

In France, the region's second biggest economy which is also struggling, President Francois Hollande said the ECB and Germany must do more to boost growth and fight a "real deflationary risk" in Europe. [ID:nL6N0QA2PM]   Continued...

European Central Bank (ECB) President Mario Draghi pauses during the monthly ECB news conference in Frankfurt April 3, 2014.  REUTERS/Ralph Orlowski