ECB decides to keep things interesting for the silly season


THERE WAS a time when the dog days of August marked the height of the silly season – politicians, lawyers and builders went on their holidays and newspapers had to rely on stories about killer chipmunks and images of Jesus appearing in slices of toast, to fill their pages.

However, recent years have been different, courtesy of the euro zone crisis. Last August, headlines were dominated by the extreme market turbulence that arose when a lack of coherent leadership exacerbated investor jitters. With Spain’s borrowing costs hitting fresh highs last week and renewed fears over Greece’s debt sustainability, we could be set for another bumpy ride in the month ahead.

On Thursday, the European Central Bank will announce any change to its main refinancing interest rate. Last month, the rate was cut by a quarter of a percentage point to a new record of 0.75 per cent and the ECB also slashed the rate it pays banks for overnight deposits to zero.

ECB policymakers have since hinted that further interest rate action may be taken if the economic outlook warrants it. Some analysts are forecasting another 0.25 per cent cut to the main rate, if not on Thursday, then by early autumn.

And last Thursday, ECB president Mario Draghi said the bank will “do whatever it takes to preserve the euro”. He also signalled that that ECB may revive controversial bond market interventions, such as buying bonds of struggling peripheral countries.