ECB seen leaving interest rates unchanged

[January 13, 2011]  BERLIN (AP) -- The European Central Bank is set to leave its interest rates untouched on Thursday and face questions about its bond-buying activities as the eurozone debt crisis enters a new year with Portugal in the spotlight.

The ECB is widely expected to leave its benchmark refinancing rate at a record low of 1 percent, where it has stood since May 2009, although annual inflation in the eurozone rose to 2.3 percent in December -- above its target and a two-year high.

Attention at bank President Jean-Claude Trichet's post-decision news conference may focus on the recent acceleration in the ECB's bond-buying program.

The bank, the European Union and the 17 governments that share the euro are struggling to contain a crisis caused by too much state debt in some countries. They are trying to reassure bond investors that countries will not default and keep the interest rates on their debt loads from rising so high they can no longer afford to borrow.

An auction of Portuguese debt Wednesday went off fairly smoothly, with many analysts crediting the success to a pickup in the ECB's bond purchases this week. Portugal insists that it doesn't need to follow Ireland and Greece in seeking a financial rescue -- though fears remain that it may have to.

Buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.

So far, the ECB is thought to have made around euro74 billion ($115 billion) in direct bond purchases via a program that was authorized in May alongside the euro110 bailout of Greece. Recent figures have shown there's been a step-up in its purchases following Ireland's euro67.5 billion bailout in November.

While seeking to contain the debt crisis, the ECB still has to fulfill its mandate of keeping inflation under control. Its target is "close to but below 2 percent."

Economic growth across the eurozone continues, thanks primarily to Germany, but that could fuel fears of rising inflationary pressures. Many analysts blame rising energy costs for the recent spike in inflation, suggesting it will likely only be short-term in nature.

Wednesday's meeting of the ECB governing council is the first since the Estonia joined the eurozone on Jan. 1, bringing its membership to 17.

The Bank of England is also meeting Thursday, and it too is likely to keep its main interest rate unchanged at 0.5 percent despite rising inflation levels in Britain.

[Associated Press]

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