ECB keeps its gunpowder dry

The European Central Bank held fire on both interest rates and other policy measures at its regular meeting here Thursday, insisting the onus is now on governments to get the eurozone's finances on a sustainable footing.

"The ball is completely in the court of the governments, not the ECB," central bank chief Mario Draghi repeatedly told a news conference after the bank's governing council voted to keep borrowing costs in the single currency area at their current historical lows.

Financial markets had not priced in any rate cut this week as analysts believed such a move would likely have little effect on the region's sputtering economy at the current juncture.

And Draghi gave no clear indication as to when such a move might come.

When asked whether the governing council had discussed a possible easing of monetary conditions at its meeting Thursday, Draghi was evasive, saying only that all monetary instruments had been discussed.

Nevertheless, he appeared downbeat about prospects for the euro area economy, which some ECB watchers interpreted as a sign that the central bank could cut rates further down the line.

"Looking ahead to next year, the growth momentum is expected to remain weak," Draghi said.

The ECB's policy measures -- both standard and non-standard -- were supportive for economic growth, he argued.

"But the necessary process of balance sheet adjustment in the financial and non-financial sectors and an uneven global recovery will continue to dampen the pace of recovery," he said.

"The risks surrounding the economic outlook for the euro area remain on the downside."

Draghi said the bank's latest anti-crisis measures -- the OMT bond-purchase programme unveiled two months ago -- stood primed for action, but it would be up to governments to decide when to take advantage of it.

"We stand ready to act," he said. "The mechanism is a fully effective backstop. And it's in place. It's up to countries to take the right steps for it to be activated," Draghi said.

In September, the ECB unveiled the OMT or Outright Monetary Transactions scheme, whereby the central bank buys up the sovereign bonds of the region's most debt-wracked countries as long as key conditions are met.

The mere announcement of the scheme seems to have succeeded in bringing down borrowing costs of countries such as Spain without a single bond being bought.

There has been much speculation about whether Spain will actually apply for help, but Draghi was insistent that the decision was for the Spanish government alone.

ING Belgium economist Carsten Brzeski said Draghi's insistence on the importance of the OMT programme "indicates that the ECB currently does not consider rate cuts as an effective tool to tackle the recession."

The OMT "remains the crown jewel in the ECB's anti-crisis toolbox," he said.

But it "is not the magic bullet that can also restore growth. Even with structural reforms, austerity measures and an active OMT, chances are high that the ECB will need to come up with additional measures to support the eurozone economy. A rate cut, even if it will not come next month, could be part of the measures," Brzeski said.

Berenberg Bank economist Christian Schulz also saw the OMT as the ECB's "sharpest monetary weapon" at present.

"Keeping this weapon sharp by communicating the readiness of the ECB to employ it and by retaining German political support for it outweigh the potential benefits of other policy easing measures," Schulz said.

Commerzbank chief economist Joerg Kraemer noted that Draghi had said the OMT has actually led to a more expansionary policy because very low key interest rates can now better work through to businesses and consumers.

"All this supports our main scenario that the ECB is likely to keep rates stable in the coming 12 months," he concluded.

Separately, the ECB said it will launch a new series of euro banknotes gradually over the coming years, starting with a new five-euro note in May 2013.

The new banknotes would have the same colours and sames denominations as the the current ones -- five, 10, 20, 50, 100, 200 and 500 euros -- but would be "easy to distinguish from the first series."

They would be introduced in ascending order, so that after the five-euro note, the 10-euro note would follow.

Initially, the first series would circulate alongside the new banknotes, but old notes will gradually be withdrawn and eventually cease to be legal tender, the ECB said.

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