ECB poised to hold rates steady as eurozone bond tension eases

The European Central Bank sat down Thursday to its first meeting of the new year where it is widely expected to keep rates at an all-time low, despite record high unemployment in the recession-wracked eurozone.

On the eurozone bond market, tension on Spanish and Italian bonds eased sharply in a further sign that some of the immediate steam is evaporating from the eurozone debt crisis.

Nevertheless, some economists suggested ECB chief Mario Draghi could keep open the door for further rate cuts to support the 17-nation euro area in case the economy takes another turn for the worse or the debt crisis strikes the markets again.

"We expect today's ECB meeting to be relatively uneventful. Both conventional and unconventional monetary policy will most likely remain unchanged, although Draghi will continue to sound dovish and retain a clear easing bias," said analysts at UniCredit in a daily note to investors.

ING Belgium economist Carsten Brzeski agreed.

"This week, the ECB will ring in the New Year with a rather unexciting meeting. Rates should remain on hold and the ECB should confirm its current 'wait and see' mode," he said.

"We think that there is little chance that the ECB will cut interest rates," said Marie Diron of Ernst & Young Eurozone Forecast.

"With a growing perception that key sources of downside risks to the eurozone and global economy have now significantly diminished, it seems improbable that the ECB's governing council will shift in favour of a rate cut," she concluded.

At last month's meeting, Draghi told reporters that the 23-member governing council had held a discussion on the merits of cutting rates but decided in the end to hold them at the record low 0.75 percent.

Since then, the eurozone economy has thrown up a mixed bag of data for ECB governors to chew over.

Unemployment has reached a record high of 11.8 percent, according to official figures, with nearly 19 million people without work in the embattled single currency zone.

Nevertheless, there were also tentative signs of recovery, with some forward-looking data providing encouragement.

Last week, the closely watched Purchasing Managers Index or PMI for the entire euro area hit a nine-month high, offering hope the single currency area could be moving out of its deep double-dip recession.

Recent business confidence data for Germany, Europe's biggest economy, have also come in better than expected.

And on Thursday, borrowing costs for both Spain and Italy eased, a sign of strengthening financial confidence.

Draghi was scheduled to hold his regular monthly news conference at 2:30pm (1330 GMT) to explain the reasoning behind the decision.

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