ECB holds rates as markets demand action on crisis

The European Central Bank held its key rate at a record low Thursday as it mulled other ways to combat the crisis with the leaders of Italy and Spain also grappling for answers to the eurozone turmoil. At what one analyst has dubbed the "most exciting meeting for a long time," the ECB decided to keep its key interest rate at 0.75 percent, with traders hoping ECB head Mario Draghi would announce firm action to satisfy the markets. Attention now turns to Draghi's regular news conference, with expectations sky-high after his unusually strong pledge last week to do "whatever it takes" to preserve the euro, adding: "And believe me, it will be enough." Meanwhile, the leaders of two of the countries most badly-hit by the crisis, Italy's Mario Monti and Spain's Mariano Rajoy were to meet in Madrid to discuss political solutions to the turbulence that has crippled their economies. In a speech in Finland earlier Thursday, Monti warned the crisis was bringing a "resurgence of some prejudices or steroetypes" to the continent and feared the return of "old phantoms (of) mutual scepticism". With the prospect of a "game-changing" announcement from Draghi, traders were cautious, with European markets flat ahead of the ECB's rate decision at 1145 GMT and with a news conference to follow. Trade was also muted in Asia, with Tokyo and Sydney making fractional gains and Hong Kong, Shanghai and Seoul closing slightly lower. "We are now waiting to see whether the ECB can put their money where their mouth is," said Stuart Ive, a trader at HiFX. Analysts are eyeing two possible ECB actions that could help tame the eurozone debt crisis: a decision to buy the bonds of struggling nations or an offer of unlimited borrowing for the EU rescue fund. The most probable ECB course is the resumption of its disputed programme of buying bonds on the secondary market so as to drive down borrowing costs for the likes of Spain and Italy. The ECB began this programme in 2010 but effectively mothballed it after buying some 211.5 billion euros ($260 billion) in bonds from Greece, Ireland and Portugal -- all bailed out -- and Italy and Spain.  The purchases were hugely controversial in the central banking world and prompted the resignation of the two top German representatives at the ECB, who thought it compromised the cherished independence of the bank. The powerful German central bank is still thought to be cool on the idea of restarting the programme, leading analysts to speculate Draghi may not announce its immediate resumption but merely threaten its deployment in future. The need for action was shown yet again Thursday when Spanish borrowing costs jumped at an auction of its benchmark 10-year bonds. Another option might be to give the EU's rescue fund a banking licence so it could borrow directly from the ECB, giving it unlimited firepower to tackle the crisis.  However, this has also run up against firm German opposition. Germany's Sueddeutsche Zeitung daily raised yet another possibility, saying Draghi would announce coordinated action to buy bonds on behalf of the ECB and the EU bailout fund, the EFSF. But several economists have suggested that Draghi's new policy of firm talk may suffice to calm the markets and obviate the need for actual policy action. "More likely than not, the ECB will not act immediately but deliver a strong verbal intervention instead," said Berenberg Bank analyst Christian Schulz. "With luck, a forceful verbal intervention might already be enough to end this wave of the euro crisis," Schulz added. However, others warned Draghi had raised expectations so high with his comments last week that markets were bound to react with disappointment if he did not follow up with a "game-changing" policy effort. "After his strong statements, the ECB president will have to deliver something," said ING Bank analyst Carsten Brzeski. Christoph Balz from Commerzbank said he was expecting "the most exciting ECB meeting for a long time" but predicted Draghi would "remain vague on many points."  Analysts at Capital Economics feared that Draghi had raised expectations to fever pitch, meaning that even a resumption of the bond-buying programme could leave investors "unimpressed". "The ECB's bark could prove louder than its bite," they commented. The Bank of England also held its monthly policy meeting Thursday and left its main interest rate steady at 0.50 percent while announcing no change in its Quantitative Easing (QE) stimulus policy.