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ECB holds key rates steady

The European Central Bank has held its key interest rates steady as expected.

FRANKFURT:The European Central Bank (ECB) held its key interest rates steady as largely expected on Thursday.

The ECB left its central "refi" or refinancing rate unchanged at 0.25 per cent at its monthly policy meeting, it said in a statement.

The central bank also held its other two key rates -- the marginal lending rate and the deposit rate -- unchanged at 0.75 per cent and zero per cent respectively.

There had been speculation that the central bank could ease monetary conditions in the 18 countries that share the euro after area-wide inflation came in lower than expected last month.

The ECB already surprised the markets with a quarter-point rate cut in November.

ECB President Mario Draghi was scheduled to explain the reasoning behind the latest decision at a news conference.

Natixis economist Cedric Thellier suggested that Draghi could still reveal so-called "non-standard" measures at the conference.

Those are measures not related to interest rates, but still aimed at easing monetary conditions to get credit flowing again in the euro area, one of the most important factors in any economic recovery.

In addition to changing interest rates, the ECB could pump more liquidity into the financial system via so-called LTROs, or Long Term Refinancing Operations, to get credit flowing again between banks and businesses, crucial if any economic upturn is to be sustained.

The ECB already pumped more than 1 trillion euros ($1.3 trillion) into the banking system at the end of 2011 and the beginning of 2012 to avert a potentially disastrous credit crunch.

"We expect Draghi to announce further non-standard measures, likely partial sterilisation of the SMP" bond-buying programme, said Thellier at Natixis.

The so-called Securities Markets Programme (SMP) is a bond-purchase programme via which the ECB purchased more than 200 billion euros of eurozone government bonds when debt markets were under stress.

In order not to allow this liquidity to trigger inflation, the ECB has always "sterilised" it by taking deposits from banks.

But there has recently been speculation that it could partially stop sterilising it in order to boost the amount of so-called excess liquidity -- money banks have beyond what they need for their day-to-day operations -- in the financial system.

However, Annalisa Piazza at Newedge Strategy said she did not think such a move -- which would be tantamount to the so-called quantitative easing or QE practised by other central banks -- was on the cards.

"There has been increasing speculation that the ECB might decide to stop the sterilisation of its SMP, working in the direction of pure QE," Piazza said.

"We would be really surprised to see the ECB making such a move as it would go against the ECB treaty," she said.

The ECB argues that quantitative easing is not allowed in its statutes because it would effectively be a way of financing government deficits.

"In our view, a rate cut cannot be ruled out in the future but another step at today's meeting could have been interpreted as a 'panic' reaction to the drop in inflation," Piazza said.

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