Markets wait for next ECB move

Financial markets are waiting to see whether the European Central Bank is ready to step up action to end the debt crisis after a recent series of unprecedented measures, analysts said. The ECB's governing council convenes for its regular monthly policy-setting meeting on Wednesday, a day earlier than normal owing to the Easter holidays. It is not expected to announce any changes in interest rates -- currently on hold at the historically low level of 1.0 percent. But ECB watchers are keen to hear whether president Mario Draghi has any further cards up his sleeve to bring the long-running sovereign debt crisis to an end, or whether the bank is now drawing up a so-called "exit strategy" to wind down the raft of recent exceptional policy measures. The ECB was quick to take on a fire-fighting role from the very beginning of the crisis. It quickly reversed last year's rate hikes to bring eurozone borrowing costs back down to an all-time low of 1.0 percent and embarked on a hotly contested programme of buying up the bonds of debt-mired countries. Most recently, in two so-called long-term refinancing operations (LTROs) in December and February, it pumped more than 1.0 trillion euros ($1.3 trillion) into the banking system in a bid to avert a dangerous credit squeeze in the 17 countries that share the euro. In the wake of such hectic action, analysts believe the ECB will now hold its fire as it assesses what effects the moves are having so far. Indeed, some officials already seem to be talking about an exit strategy. Last week, executive board member Benoit Coeure insisted that "a timely exit from non-standard measures and a return to a less accommodative stance -- once the economic conditions are ripe -- are essential." Low interest rates over long periods "might fuel excessive risk-taking, leverage and asset price bubbles ... (and) might discourage banks, companies and governments from strengthening their balance sheets and therefore create a dependence on low rates," Coeure argued. ECB watchers, however, believe it is too early for the central bank to consider hanging up its fire-fighting helmet at this point. Draghi "won't entirely rule out further action to support the region's banks should the dangers of a funding crisis" resurface, said Capital Economics' chief European economist Jonathan Loynes. "But he may hint that the ECB is nearing the limit of what it is prepared to do and may soon start to think about how to exit some of its policy measures," he said. Loynes predicted the ECB would not cut interest rates again "in the current cycle and with the full effects of the first two LTROs not yet clear, it is too early to expect the ECB to announce further such operations this month." ECB officials insist the LTROs in particular have been a success but central bankers and analysts agree they will not be enough to solve the eurozone's crippling debt crisis on their own. "We must realise that all the money we put on the table will not buy us a lasting solution to the crisis," said ECB governing council member and Bundesbank President Jens Weidmann. "All we can buy is time, time that must be used to address the root causes of the crisis," he said. The initial euphoria triggered by the LTROs does indeed appear to be waning. Contrary to the ECB's hopes, banks are not yet lending the cheap money on to households and businesses, key data showed last week. Christian Schulz at Berenberg Bank said that while the LTROs "may have averted the tail risk of euro-area banks collapsing due to liquidity shortages and stopped the spread of contagion on sovereign bond markets ... they do not yet seem to have the desired effect on lending to the real economy." Overall, "it seems unlikely that the ECB's April meeting will result in any significant policy announcements or changes," concluded Loynes at Capital Economics.