ECB Takes a Step Back

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European Central Bank President Mario Draghi is likely to argue that the institution has, with its massive liquidity injections in December and February, done its part to soothe the worst symptoms of the financial crisis. With that, Draghi is widely expected to announce that the ECB Governing Council has decided to leave the key lending rate unchanged at 1 percent when he holds his monthly news conference on Thursday.

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Draghi is expected to signal that interest rates will remain on hold, and that no other special operations are in store, when he holds his press conference on Thursday. ECB policymakers are likely to take a beat to assess their handiwork, which seems to have stabilized the euro zone at least enough to prevent a sharp downturn.

On Thursday, the Bank of England is expected to keep its key lending rate on hold at a record low 0.5 percent, where it has stood since March 2009. The central bank is also expected to leave the size of its quantitative-easing program unchanged.

The European Central Bank has delivered two rate cuts since Draghi took over for Jean-Claude Trichet in November. The central bank also lowered its refinancing rate back to a record low 1 percent, undoing two hikes delivered earlier in the year.

Draghi announced in December the ECB would supplement its range of other extraordinary liquidity measures by meeting all demand by euro-area banks for cheap, three-year loans in a pair of long-term refinancing operations, or LTROs. Between the two LTROs, one in December and one in February, hundreds of euro-zone banks borrowed more than a trillion euros.

Though banks still appear reluctant to lend to each other, with the amount of money simply being parked overnight in the ECB’s deposit facility surging to fresh records in the wake of last week’s LTRO, the operations do seem to have fueled demand for sovereign debt. Italian and Spanish government bond yields are down sharply from crisis levels seen late last year.

With so much liquidity now in the banking system, Draghi isn’t expected to announce a third LTRO, but markets are hoping for a sign that the central bank will at least leave the door open for one.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

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