The European Central Bank may be prevented from raising interest rates again this year as economic growth slows and the region’s debt crisis spreads to Italy and Spain, increasing pressure on the ECB to resume bond purchases. Policy makers meeting in Frankfurt today will keep the benchmark rate at 1.5 percent, according to all 54 economists in a Bloomberg News survey. With yields on Italian and Spanish bonds near euro-era records and the German economy showing signs of weakening, investors have reduced bets on the ECB adding to its two rate increases in 2011, even as some central bank officials push for more monetary tightening to tame inflation. “Even if the hawks push for one additional hike before settling into wait-and-see mode, the odds of no further rate hike in 2011 have risen strongly,” said Peter Vanden Houte, chief euro-area economist at ING Group in Brussels. “Now that core countries are also showing signs of weakening, a pause in the tightening cycle is becoming increasingly likely.” While European leaders last month agreed on a second bailout package for Greece that includes voluntary contributions from private-sector bondholders and widens the scope of the European rescue fund, investors aren’t convinced the measures will stop the 21-month crisis from spreading. Governments must still ratify the plan, which would empower the rescue fund to start buying bonds on the secondary market. Bond Program The ECB, which ceased buying the bonds of distressed euro- area governments 18 weeks ago, may be forced to re-enter markets if Italian and Spanish yields keep rising, said Jens Sondergaard, senior economist at Nomura International Plc in London. The central bank has bought 74 billion euros ($106 billion) of assets since May last year in an effort to ease market tensions. “If financial market sentiment continues to deteriorate, we think the ECB will re-activate its bond-buying program” as soon as today, Sondergaard said. The ECB announces its rate decision at 1:45 p.m. in Frankfurt and President Jean-Claude Trichet holds a press conference 45 minutes later. The Bank of England will keep its key rate at 0.5 percent today, according to another survey of economists. That decision is due at noon in London. The debt crisis in Europe and U.S. political turmoil on the government’s borrowing limit have started to hurt other economies as investors seek safe havens, driving up exchange rates and undermining exports. The Swiss National Bank unexpectedly cut interest rates yesterday and said it will increase the supply of francs to money markets to stem the currency’s gains. It had previously surged 10 percent against the euro in the past two months to a record. Italy, Spain While the ECB has put the onus on governments to come up with a solution to Europe’s worsening crisis, soaring bond yields in the region’s third and fourth-largest economies are raising the stakes. The yield on 10-year Italian bonds jumped to 6.26 percent yesterday, the highest since the introduction of the single currency in 1999, while the yield on Spanish 10-year debt surged to 6.46 percent this week. Credit default swaps imply a 27 percent chance that Italy will default on its debt within the next five years and a 30 percent probability that Spain won’t be able to meet its obligations. Spain is due to auction bonds today. “If the ECB didn’t re-activate its bond program in the last few weeks, it won’t do so now,” said Klaus Baader, chief euro-area economist at Societe Generale SA in London. “It would be harmful for the political discussion because governments may take it as a reason to restrain potential interventions by the rescue fund.” Economic Impact There are signs the debt crisis is starting to weigh on confidence in core euro-area economies such as Germany, where growth is already slowing as the global recovery falters. Investor sentiment dropped to a 2 1/2 year low last month and business confidence declined. European services and manufacturing growth weakened in July to the slowest pace since the euro region emerged from recession two years ago. The ECB in June revised down its 2012 growth forecast to 1.7 percent from 1.8 percent. Investors have pushed back expectations for another ECB rate increase into next year, Eonia forward contracts show. While economists still expect the ECB to tighten borrowing costs again in October, according to the median of 33 forecasts in a July 29 survey, the number of those expecting no change in rates rose to 14 from 10 in the previous survey on July 1. Inflation Pressure Euro-area inflation, which the ECB aims to keep just below 2 percent, slowed to 2.5 percent last month from 2.7 percent in June, driven by a sharp drop in Italy’s rate. M3 money supply growth, which the ECB uses as a gauge of future price pressure, also decelerated. At the same time, inflation in Germany unexpectedly quickened to 2.6 percent. Bundesbank President Jens Weidmann said on July 7 that the ECB’s interest rates are “still relatively low,” indicating he sees room for further tightening. Fellow ECB council member Andres Lipstok of Estonia said on July 26 that focusing excessively on countries that have succumbed to the region’s debt crisis entails the “threat of price-rise acceleration in the entire euro area.” “It might be a bit too early to see them significantly changing their language,” said Nick Kounis, head of macroeconomic research at ABN Amro NV in Amsterdam. “But if you look at the way things are going, there has to be some heightened probability now of a pause in rate hikes.” To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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