ECB Plans to Hold Firm in Debt Crisis Policy

No additional bond-buying or other measures planned

The European Central Bank (ECB) had no plans to announce at its Thursday meeting that it would launch any additional bond-buying measures or take any other action to combat the debt crisis in the euro zone, holding steady against calls for more action.

Reuters reported Thursday that despite calls in financial markets for the central bank to boost its crisis-fighting measures by buying Spanish sovereign bonds, policymakers at the ECB had no such plans as they prepared for the meeting in Barcelona.

It was expected that demonstrators would be protesting the country’s austerity measures outside the meeting, but officials were considered more likely to praise Spain’s efforts to cut its deficit than to announce any policy action such as a restart of the ECB’s Securities Markets Program (SMP).

Despite increases in Spanish bond yields to 6%, for the last 7 weeks the ECB has let its bond program lapse. Should yields rise to 7%, that is considered unsustainable and could possibly trigger some sort of action. However, Germany’s Bundesbank has resisted any move by the ECB to cut interest rates or restart its bond-buying program, and it is unlikely the central bank will go against that position.

"The euro crisis has not escalated to such an extent recently that [ECB President Mario Draghi] would want to take on the Bundesbank on that," Berenberg Bank economist Holger Schmieding commented in the report concerning the bond-buy program.

RBS economist Nick Matthews was quoted saying, "I think the reactivation of the SMP will occur only at a point at which the situation has deteriorated significantly and I think the pressure would have to be greater than that we've seen in recent weeks."

An interest rate cut at some point in the year is a possibility should Draghi feel an increased risk of the rest of the euro zone following the U.K. back into recession; recent purchasing managers' index scores have indicated that the euro zone is suffering amid cutbacks from austerity and reduced consumer spending. The ECB has never before reduced its main rate below 1%—but Draghi has not ruled out such an action.

Schmieding said, "He will probably emphasize the downside risks to growth without getting close to signaling a rate cut for June. A June cut is not likely but it is not impossible and he will likely keep the options open when asked about it."

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