ECB to signal policy lull as debt storm calms

Mon Mar 5, 2012 12:07pm EST
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By Sakari Suoninen

FRANKFURT (Reuters) - The European Central Bank is likely to signal on Thursday that it has done all it intends to do to fight the euro zone crisis, putting the onus back on governments after cutting interest rates and flooding the market with cash in recent months.

Banks have been shored up and government debt markets stabilized by two ECB cash injections totaling more than a trillion euros since December, steps which ECB President Mario Draghi says have averted a major credit crunch.

But other policymakers have expressed worries that the wall of cash could add to problems down the road, with German central bank head Jens Weidmann leading the charge for the ECB to think about an exit strategy.

While it is too early for the 17-country bloc's central bank to say anything publicly about when it plans to tighten policy, it has taken just two weeks for economists to back off forecasts that it will cut interest rates again within months.

"We may see not a really hawkish press conference, but a pretty clear statement that unless the economy takes another lurch down, that's it, we're finished, no more rate cuts, no more liquidity, we're done," Societe Generale economist James Nixon said.

Draghi said last month that the policymakers did not discuss cutting rates in that meeting and with the tentative signs of economic stabilization increasing, any pressure for them to ease policy further has diminished.

The ECB's wait-and-see mode also extends to its bond-purchase program, which has seen no action in the past few weeks.

However, Draghi is expected to offer no new information about the strategy, and just repeat the mantra that the program is ongoing. The recent liquidity glut has helped hold down the borrowing costs of especially Spain and Italy by encouraging banks in those countries to buy government bonds.   Continued...

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt February 29, 2012. REUTERS/Alex Domanski