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ECB to hold rates with eye on Spain

Thursday, October 04 11:30:42

ECB President Mario Draghi will keep his bond-buying bazooka on display when the bank meets today, but Spain's reluctance to request aid from EU partners means he is unlikely to pull the trigger soon.

A month after Draghi unveiled the bond-purchase plan that was hailed by many as a saviour for the single currency bloc, investors are still waiting for Madrid to bite the bullet on a rescue.

Before it does, the ECB cannot act, and markets are likely to remain jittery. Spanish two-year note yields have climbed more than half a percentage point in the weeks since Draghi's plan was unveiled - a reminder that action not words are needed to resolve euro zone's three-year old crisis.

"Given that the ECB's actions are hostage to the political debate, in particular the EU/Spain dialogue on Spain's request for (European Union) aid, some news that Mr. Draghi himself is encouraged by developments will go a very long way to provide support to the market," economist Lena Komileva at G+ Economics said.

The central bank's governing council is expected to hold interest rates steady on Thursday after its meeting outside the Slovenian capital of Ljubljana, to allow time for new details to emerge on the health of the euro zone economy and inflation.

Since announcing his plan to buy the short-term debt of struggling euro zone countries to reduce their borrowing costs, Draghi has stressed repeatedly that it is up to governments to take action. But he will nonetheless be quizzed on his assessment of the current negotiations on Spain, which has announced new budget measures in recent weeks to try to regain the confidence of markets. Beset by anti-austerity protests and threats of secession by the wealthy northwestern region of Catalonia, Spanish Prime Minister Mariano Rajoy has resisted a formal aid request, in part because Germany opposes it, sources told Reuters this week.

He is also worried about the perception that Spain's policies are being dictated from abroad, although analysts said the ECB was unlikely to attach stricter conditions to any bond-buying than those set by the EU and the IMF.

"The ECB will not be setting additional conditionality, you cannot reasonably expect it to do that," said Unicredit economist Marco Valli, who believes Spain will apply for aid after local elections later this month. (C ) Reuters