ECB to keep rates on hold

The European Central Bank is set to keep its key interest rates steady at a policy meeting on Thursday, despite concerns about the destabilising effects for the euro area of political gridlock in Italy. "We do not expect any change in the monetary policy stance," said Marie Diron of Ernst & Young Eurozone Forecast. "Fears that were raised as a result of the uncertainty regarding Italy's political situation and economic and fiscal policies seem to have abated somewhat," the expert said. "Also, the euro has weakened slightly which takes some of the pressure to lower interest rates off," she added. ECB chief Mario Draghi believes that with interest rates currently at a record low of 0.75 percent, an unprecedented amount of liquidity pumped into banks and a key bond-purchase programme in place, the central bank has already done its utmost to help resolve the long-running crisis. However, the gridlock in last week's general elections in Italy, where a centre-left coalition won the most votes, but not enough to form a majority in parliament, focussed market attention back on whether the ECB might have to step in again to stamp out fears of a resurgence in the crisis. Italian-born Draghi is unlikely to let himself be drawn into making any comment on domestic political issues in his home country. But political developments there "will be a topic in the question-and-answer session" of the traditional post-meeting ECB news conference, noted analyst Marco Valli at the Italian bank UniCredit. ING Belgium economist Carsten Brzeski said that while a further rate cut might be justified, "in our view the ECB is still inclined to keep rates on hold. "With the monetary transmission mechanism still not functioning properly, a rate cut is not the right policy answer," he argued. "Moreover, the political uncertainty in Italy should rather lead to ECB inactivity than new action. All possible ECB action cannot substitute the need for austerity measures and structural reforms," Brzeski said. "Therefore, and to avoid political complacency, the ECB looks likely to keep its last ammunition dry," he concluded. Also on the agenda of the meeting will be the ECB's updated staff projections for growth and inflation. In the last round of forecasts published in December, the ECB had foreseen a contraction in the eurozone economy of 0.3 percent this year followed by growth of 1.2 percent in 2014. "We do not expect significant revisions to their growth outlook which is similar to ours -- a small contraction this year followed by a muted recovery in 2014," said Diron at Ernst & Young. "Any large revision in particular to growth in 2014 would be a dovish signal from the ECB and could be interpreted as increased chances that it will lower interest rates" in the months to come, she concluded.