BRUSSELS (MNI) – The European Central Bank is unlikely to lower
interest rates or adopt any major new crisis-fighting initiatives when
it meets Thursday.

The ECB – the guardian of price, and increasingly financial
stability in the Eurozone – has doubts about the usefulness of another
rate cut, and it is still waiting to see how governments will return
the gift-shot of secondary market bond intervention that it lobbed into
their court last month.

ECB Executive Board Member Benoit Coeure said on September 23 that
although “the jury is still open whether there should be another rate
cut,” he did not think it “absolutely obvious that another rate cut
would be necessary in the light of recent economic indicators and in
light of inflation developments.”

Speaking on the sidelines of an informal meeting of Eurozone
finance officials in Cyprus on 17 September, ECB Governing Council
member Josef Bonnici said that the impact of a cut in interest rates
would be “very limited” because they are already so slow.

Governing council member Ewald Nowotny on September 25 also said
that he saw “no need for a change in interest rates in the euro area,”
and that he considered the theoretical possibility of a negative deposit
rate to be neither “desirable nor realistic”.

Perhaps most importantly of all, ECB President Mario Draghi has
repeated his argument that “very severe fragmentation” across the
Eurozone means quite simply that interest rates are not being properly
transmitted, so non-standard policies are called for.

“For the ECB, new steps have been needed to maintain price
stability in the face of a fragmented financial market,” Draghi told
German lawmakers last week. “These new steps are not a departure from
our mandate, indeed they are the only way to ensure that we continue to
fulfill our mandate,” he insisted.

Vice President Vitor Constancio revealed on September 14 that a
consideration of interest rates at the ECB’s last meeting “was not
really an issue” and that the current rate level is “okay for the
moment.”

With the Eurozone crisis weighing on growth prospects, no ECB
policymakers expressing any discomfort about inflation risks or
expectations, and even arch-hawks like Bundesbank President Jens
Weidmann seeing “no immediate inflationary danger,” the chances of a
rate rise seem extremely slim.

After declaring last month that it was willing to spend unlimited
amounts in the secondary bond market to normalise conditions for
governments that seek aid from the Eurozone’s bailout funds and agree to
strict conditions, the ECB is unlikely to introduce any major new
crisis-fighting manoeuvres since Eurozone governments have yet to
respond to the ECB’s offer to buy their bonds.

Following the announcement of the Outright Monetary Transactions
progamme, Draghi said that it was too soon to start thinking about
additional non-standard measures, such as buying private sector debt or
extending more long-term cheap loans to banks. The ball is now very much
in the court of Eurozone governments, he suggested.

Working closely with the European Commission, the Spanish
government has continued to pursue a strategy of fiscal and structural
reforms that could form the basis of an eventual sovereign aid deal, but
it has not made an official request for aid beyond the bailout for its
banking sector agreed last June.

Spanish and EU officials have indicated that Madrid would be
prepared to seek some form of sovereign aid from the Eurozone’s bailout
funds – provided that the terms attached did not go too far beyond what
it is already doing and the oversight was not too intrusive. But recent
attempts by Germany, Finland and the Netherlands to renegotiate key
aspects of Spain’s bank bailout could make Madrid more wary of seeking a
sovereign aid package soon.

Central bank officials told MNI that the ECB would be prepared to
step in and buy bonds should Spain request aid and agree to satisfactory
conditions. “The question of ECB preparedness is not a big issue,” one
central banker said. “The ECB will be ready. The question is whether
Spain will be.”

Any significant further actions on the part of the ECB before
Eurozone governments make a substantial move could risk unnecessarily
aggravating divisions within the ECB – particularly between Draghi and
Weidmann – over whether the central bank is veering too far from its
price stability remit.

–Brussels Newsroom, +324-952-28374; pkoh@mni-news.com

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