Those market watchers expecting the European Central Bank to cut rates today were left disappointed. Meanwhile the 28 of 58 economists who predicted today’s outcome in a Bloomberg survey were probably left feeling quite smug. During a meeting in Frankfurt policy makers did not change the record low benchmark rate from 0.75 per cent.
Before the decision was announced an economist with NordLB in Hanover forecast: ‘The ECB is keeping its powder dry for now and will probably cut rates next month.’ Jens Kramer continued; ‘All eyes are on the bond plan today. Cutting rates won’t really have an impact, but it would be an additional signal that the ECB will throw its full arsenal at saving the euro’.
Last month ECB president Mario Draghi made some rather provocative statements in which he pledged to do ‘whatever it takes’ to save the troubled euro. During this afternoon’s press conference it’s likely that investors will find out whether or not he meant it.
It has been reliably reported that earlier this week (during a closed-door session with the European Parliament) Draghi confirmed his intention of intervening in the bond buying market with the purpose of regaining control of interest rates.
This will come as a relief to those who put a great deal of stock in Draghi’s earlier assertions. With the borrowing costs of Spain and Italy spiralling, the euro-zone has been stretched to breaking point and the pressure on Draghi to take immediate action to save it has been mounting.
If he fails to deliver on his promises the disappointment to investors would be immense, and it could significantly damage his career. Barclays chief European economist Julian Callow asserted that; ‘Draghi has put his credibility squarely on the line. He has made it his business to save the euro, so he is going to be called on that’ whilst other industry experts expressed the feeling that Draghi had ‘set the bar very high for market expectations.’
It has been suggested that the ECB’s resolution to hold rates may be because a decision has finally been reached regarding the specifics of the bond-purchase plan. As a consequence there was a slight show of confidence and the euro rose 0.3 per cent to $1.2642 – its highest level since July 2nd.
Whether or not this confidence was misplaced will soon be revealed.