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ECB to sit tight on rates this week

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Arab Today, arab today ECB to sit tight on rates this week

Frankfurt - AFP

No changes in eurozone interest rates are expected this week as the European Central Bank assesses the impact of recent moves to flood the banks with cash to avert a credit crunch, analysts say. At the same time, ECB chief Mario Draghi could be running into increasing resistance from Germany\'s traditionally orthodox Bundesbank over many of the unconventional policy measures he has initiated since taking office in November. The ECB\'s governing council, meeting on Thursday for its regular monthly policy-setting meeting, is not expected to announce any changes to interest rates or any other measures after it pumped a record 529.5 billion euros ($701 billion) into euro area banks last week, analysts said. \"The ECB looks firmly poised to stay put with regard to interest rates and further liquidity measures,\" said Commerzbank economist Michael Schubert. Nevertheless, \"in view of the still high uncertainty, the ECB council will keep the door open to additional measures,\" he predicted. Last week, the ECB threw open its liquidity floodgates for the second time in two months, flooding the banking system with cheap funds in order to avert a dangerous credit squeeze. That brings to more than 1.0 trillion euros the total amount banks have borrowed from the ECB at exceptionally low interest rates since December. The ECB hopes the banks will lend the money to households and businesses and also use it to bring down government borrowing costs. The the measure does indeed seem to be working, even if analysts agree it will not be enough on its own to solve the eurozone\'s crippling debt crisis and will merely buy time. Draghi has been busy seeking to put out the crisis fires on other fronts, too, in the four short months of his reign so far. In December, the ECB cut rates to bring its benchmark lending rate back to its previous historic low of 1.0 percent, effectively reversing last year\'s two earlier rate hikes. It has eased the rules on bank collateral and cut banks\' minimum reserve ratio, and after long resisting calls to take a haircut or writedown its holdings of Greek bonds, it did finally agree to forego profits on them. \"After all that, we doubt that the ECB will announce any additional policy measures this month,\" said Jennifer McKeown, senior European economist at Capital Economics. UniCredit economist Marco Valli agreed. \"We expect the ECB to remain on hold both on conventional and unconventional policy next Thursday,\" he said. \"With growth indicators signalling stabilisation and the system flooded with long-term liquidity, the ECB has probably entered a prolonged period of wait-and-see,\" Valli said. That could frustrate some. The International Monetary Fund, in a paper released last week, said there was still plenty of room for the ECB to move again. \"The ECB\'s monetary policy should be highly accommodative, consistent with its mandate of ensuring price stability. This could be achieved by lowering the target policy rate, for which room exists, and, as needed, further unconventional measures,\" the IMF wrote. In the short time that Draghi has been in office, his pragmatic handling of the crisis has earned him much praise. \"Everyone loves Mario,\" wrote the Wall Street Journal, while the Financial Times said 2012 was the \"Year of the Draghi.\" But not everyone appears to be quite so happy. The influential German daily Frankfurter Allgemeine Zeitung, said it had obtained a copy of a letter from Bundesbank chief Jens Weidmann in which he urged Draghi to rethink the decision to ease collateral rules and warned about the wider risks being stored up in the financial system. Like every other eurozone country, Germany may only carry a single vote on the ECB\'s governing council but given the country\'s clout as Europe\'s biggest economy and the EU\'s effective paymaster, its support is vital for Draghi. The two men\'s predecessors, Jean-Claude Trichet and Axel Weber, similarly clashed over a controversial bond-buying programme, leading to Weber\'s abrupt resignation as Bundesbank president.

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