The European Central Bank is expected to hold back from policy moves when it meets on Wednesday, instead urging governments to address the euro zone's crisis, but it could indicate a readiness to cut interest rates as early as next month given a weakening economy and Spain's banking troubles.
The ECB is widely seen as the only institution capable of immediate action on behalf of the currency bloc, raising pressure on the bank to announce new measures after its meeting - now under way - which will be held a day earlier than usual due to a holiday.
The bank's dilemma is that if does too much, pressure for government action falls. Yet if it does nothing, troubled sovereign debtors could find it harder and harder to finance themselves or maintain confidence in the banks that have bought much of their debt. Consequently, the ECB is likely to keep its weapons holstered until after the EU summit at the end of June.
Even then, the measures it is most likely to take are ones which it views as being most directly in its purview and that help the economy and ease pressure on banks, without letting governments off the hook: an interest rate cut and an additional ultra-long term loan, similar to the two 3-year offers it has already made. And these are likely to be dependent on summit decisions.
"They are likely to signal the possibility of rate cuts and additional (long-term refinancing loans for banks) if progress is made on the political front," Citigroup strategist Steven Englander said in a note.
Read more: http://www.reuters.com/article/2012/06/06/us-ecb-rates-idUSBRE85500T20120606
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