ECB takes a breather after firing 'bazooka'

The European Central Bank is expected to hold fire on interest rates and other policy moves on Thursday as it takes stock of the market impact of its latest anti-crisis plans, analysts say. Convening for its monthly policy meeting at Brdo castle outside the Slovenian capital Ljubljana, rather than the usual venue of the ECB's Eurotower headquarters in Frankfurt, the bank's decision-making governing council is widely expected to keep its key rate at the current historic low of 0.75 percent, analysts predict. And after unveiling the details of a revamped bond-purchase programme just last month, which has since greatly helped to ease market tensions, ECB chief Mario Draghi is not expected to announce any more crisis-fighting measures, but insist it is now up to the governments to act. "After the introduction of the Outright Monetary Transaction (OMT) programme last month, we expect no new announcements from the ECB this week," said Goldman Sachs analysts in a note to investors. "We also expect policy rates to be kept on hold and no suggestion of an immediate change in policy stance," they wrote. "The ECB sees the ball as now being firmly in the court of governments, while further rate cuts would only be considered if the economic situation were to deteriorate further," the economists added. Natixis economist Cedric Thellier said that "while the governing council is certainly going to maintain (the current level of interest), it should nonetheless leave the door open for a future reduction in rates." That further rate cut would probably come in December at the same time that the ECB published its updated growth and inflation forecasts, which were likely to show a downward revision in gross domestic product (GDP) projections for 2013 and "a first projection for 2014 that should be gloomy," Thellier said. As for the bank's so-called "non-standard measures," the expert predicted the ECB would announce a new long-term refinancing operation or LTRO "to be conducted before the year end." The ECB has launched two LTROs in the past year, pumping vast amounts of liquidity into the banking system to avert a credit crunch. Last month, Draghi vowed to ride to the aid of countries like Spain by buying unlimited volumes of bonds to drive down borrowing costs, sending markets soaring as investors saw a turning point in the crisis. But after a period of calm, markets have suffered fresh volatility amid doubts over whether Spain will apply for a bailout necessary for ECB help and continued problems in Greece, the origin of the near three-year euro crisis. "In the month since the ECB President unveiled a policy 'bazooka' in the form of its new OMT programme, 10-year government bond yields in many peripheral economies have fallen sharply," said Capital Economics economists John Higgins and Ben May. "But three key questions about the effectiveness of the programme remain unanswered. Draghi may provide some answers at the press conference (on Thursday), although we suspect he will play his cards close to his chest. "More importantly, we doubt the programme -- even if swiftly implemented and large -- would be the game-changer that many assume," they cautioned. Economists will be looking for more clarity on what conditions the ECB will attach to any aid, said Michael Schubert from Commerzbank, charging that the central bank had been "unclear" on the subject. Individual members of the ECB's own board have added to the confusion, with France's Benoit Coeure saying countries would not need additional action to qualify for aid while German Joerg Asmussen said fresh reforms were required. However, Draghi may be reticent to offer more details, as he insists the OMT programme can only act as a "bridge" until governments themselves take decisive action to reform their economies and cut spiralling debts. Despite the renewed volatility on financial markets, Draghi himself has seemed more confident on the eurozone crisis, telling an audience in Berlin recently there were "a number of reasons to be positive."