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Oct 2, 2014 7:58 AM

European Central Bank keeps rates on hold

The Associated Press

NAPLES, Italy (AP) Markets are waiting to hear whether the European Central Bank is willing to offer more stimulus to a dangerously weak economy, after the bank's governing council left interest rates unchanged Thursday.

The council could hardly do anything else since its benchmark rate is at a record low of 0.05 percent. That is so close to zero that ECB President Mario Draghi says the bank has reached the lower limit.

Thursday's decision came as police squared off against more than 3,000 demonstrators in Naples, where the council held its monthly meeting, one of two held annually away from its headquarters in Frankfurt, Germany. Riot police used water cannons to break up protesters carrying banners against government austerity policies and unemployment.

Draghi is expected to use his news conference later in the day to give more details about the bank's plan to start buying bonds made up of bank loans. The program is aimed at improving credit to companies. Draghi has held the door open to even wider-ranging purchases of government bonds, so-called quantitative easing. Speculation the bank may do that has sent the euro lower recently.

By purchasing bonds representing bundled bank loans known as asset-backed securities the ECB aims to boost the market for such bonds and get banks to make more loans. The thinking is, more bonds and loans will be created if banks know there is a ready buyer, the ECB.

Actively buying bonds would give the ECB more control over the level of stimulus it is giving the economy. Its previous efforts to offer very cheap loans to banks has helped drive down interest rates, but depends on banks' willingness to take the loans. Some banks have been paying them back, which shrinks the overall level of stimulus to the economy.

Draghi said the ECB wants to increase the size of its balance sheet a measure of how much stimulus it is offering back toward levels seen in 2012. That would imply around a trillion euros of new stimulus. Some analysts question whether the ECB will find enough ABS to buy. If it has trouble, it would have to seek out a wider range of private assets such as corporate or senior bank bonds, or even government bonds.


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