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ECB holds key rates unchanged, mum on Greek debt

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The European Central Bank held key interest rates at historic lows Thursday, but made no announcement regarding Greece despite speculation it may offer a helping hand to its cash-strapped banks.

[VIENNA] The European Central Bank held key interest rates at historic lows Thursday, but made no announcement regarding Greece despite speculation it may offer a helping hand to its cash-strapped banks.

Meeting in the Austrian capital instead of its usual home venue in Frankfurt, the ECB's decision-making governing council voted not to alter borrowing costs, which have been at zero per cent since March.

Analysts had not been expecting any further policy measures in this respect following a raft of different stimulus moves three months ago.

However, in the run-up to the meeting there had been talk that the ECB might allow Greek banks to participate in its regular refinancing operations, from which they had been barred for more than a year.

But the governing council made no announcement on the issue.

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Normally, in the ECB's refinancing operations, banks receive cash in the form of very low interest loans in return for "collateral" - high-quality assets, preferably sovereign bonds, placed at the central bank as guarantee.

But given the desperate state of Greece's finances, its sovereign bonds have been classified as "junk" for some years, and are not normally eligible to be used as collateral.

Initially, in May 2010, the ECB granted Greek banks a special waiver to get around this problem, allowing them to use Greek sovereign bonds as collateral, as long as Athens kept to the terms of its international bailout programme.

But when Alexis Tsipras and his radical Syriza party stormed to power in January 2015, threatening to rescind on the terms of its international bailout, the ECB suspended that waiver in February 2015 until the new government in Athens could thrash out a new deal with its creditors.

Since then, Greek banks have been kept afloat via the Emergency Liquidity Assistance or ELA programme, which is much more expensive for them.

Many ECB watchers had been speculating that the central bank could offer a helping hand after the recent deal Athens reached with its creditors.

All eyes are now focussed on what ECB president Mario Draghi will tell his traditional post-meeting news conference, especially with regard to the economic outlook for the single currency area.

The ECB was scheduled to publish its latest staff economic projections, with analysts expecting it to upgrade the inflation forecast for the first time in a long time.

While eurozone inflation remained in negative territory in May, with consumer prices falling by 0.1 per cent, core inflation - which strips out the most volatile components such as energy, food, alcoholic beverages and tobacco - came in at 0.8 per cent in May, up from 0.7 a month earlier.

Berenberg Bank economist Holger Schmieding predicted a revision from 1.3 per cent to 1.5 or possibly 1.6 per cent for 2017, and from 1.6 per cent to 1.7 per cent for 2018.

The ECB estimates that inflation rates of close to but just under 2.0 per cent are conducive to healthy economic growth.

Mr Draghi was also expected to call for patience, arguing that the latest raft of measures had yet to be fully implemented before their economic benefits could begin to make themselves felt.

At its meeting in March, the ECB cut interest rates to zero, expanded the asset purchase programme known as quantitative easing (QE) and announced a new scheme of ultra-cheap loans for banks.

Nevertheless, Draghi was likely to keep the door open for further stimulus measures in future and reiterate that the ECB is ready to use all means at its disposal, said Natixis economist Johannes Gareis.


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