By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The European Central Bank on Thursday left its key lending rate unchanged at 1% as expected, with investors looking to Mario Draghi for clues to the institution’s next move amid intensifying fears over Spain’s banks and the potential implications of a Greek exit from the euro.
The ECB president’s monthly news conference is scheduled to begin at 2:30 p.m. local time, or 8:30 a.m. Eastern time.
That was in line with most economists’ expectations, though some had held out the possibility of a cut, which would have taken the rate below the 1% level for the first time in the institution’s history.
Draghi generally isn’t expected to unveil any fresh policy moves—such as an additional dose of long-term liquidity operations—at his news conference. But the euro, equities and other risk-oriented assets managed to rise in earlier activity on hopes the ECB chief “will offer clues about forthcoming easing in the months ahead,” said Ilya Spivak, currency strategist at DailyFX, in emailed comments.
The euro EURUSD +0.3565% traded at $1.2498 versus the dollar, up from $1.2448 in North American activity late Tuesday but little changed from the level seen ahead of the rate announcement.
Business surveys and hard data point to a contraction in second-quarter gross domestic product in the euro zone after a flat economic performance in the first three months of the year. What’s more, data, including German April industrial production figures released earlier Wednesday, indicate the slowdown has seeped into the core of the region.
German industrial production contracted 2.2% from the previous month in April, the country’s federal statistics agency said. Purchasing managers’ indexes for the region showed euro-zone private-sector activity contracted at its fastest pace in nearly three years in May.
Meanwhile, worries over Spain’s banking sector have pushed the country’s 10-year government bond yields near crisis levels seen last fall, and below the 7% threshold that triggered bailouts for the likes of Greece and Ireland.
Fears of a possible Greek exit from the euro zone following parliamentary elections on June 17 have also aggravated tensions, putting upward pressure on peripheral euro-zone yields and dragging down the euro.
Draghi, however, has maintained that it remains up to euro-zone governments to come up with solutions to the region’s continuing debt crisis, while playing down tensions in interbank lending markets.
“The ECB may reiterate its willingness to support Europe’s banking sector if credit dries up in future, but we think it will stick to its guns and resist calls to step in to directly help governments,” said Kathleen Brooks, research director at Forex.com in London.
“We will be listening out to any reference Draghi makes to Spain’s banking sector, but we believe the ECB will leave the recapitalization of some weak Spanish lenders up to the EU authorities,” she said, in emailed comments.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
