European Central Bank president Mario Draghi said today the ECB was primed to buy troubled euro zone bonds when conditions were right and that this had already calmed market tensions.
Speaking after the bank announced it would hold interest rates steady at a record low of 0.75 per cent, Mr Draghi also said "significant progress" had been made in Spain to bring its finances into order, although more was needed.
He said the euro zone's economy was expected to remain weak but that near-term price increases had led to the ECB keeping rates on hold.
A month after Draghi unveiled a bond-purchase programme for struggling euro states that was hailed by many as a saviour for the single currency area, investors are still waiting for Spain to bite the bullet and request a formal rescue. Before it does, the ECB cannot act, and markets are likely to remain jittery.
But Mr Draghi was upbeat about Spain's attempts to end its crisis. "Significant progress has been made," he said. "Significant challenges remain as well."
He refused to comment on whether Spanish bond yields were at appropriate levels. An auction earlier today saw Spanish borrowing costs fall in most cases. Mr Draghi insisted the existence of a bond-buying programme, called OMT, had already had an impact.
"OMTs have helped to alleviate ... tensions (in financial markets) over the past few weeks, thereby reducing concerns about the materialisation of destructive scenarios," Mr Draghi said. "The mechanism (to buy) is in place."
The decision to hold interest rates was widely expected, and will give time for new details to emerge on the health of the euro zone economy and for Spain to ask for aid.
Mr Draghi said in his introductory statement that high energy prices and increases in indirect taxes in some euro area countries were expected to keep inflation rates above 2 per cent throughout the year, but rates would fall again in the course of next year.
ECB executive board member Benoit Coeure said last week that economic and inflation data did not justify an October cut - a view echoed by Austria's central bank governor Ewald Nowotny.
Economic reports signal the euro zone returned to recession in the third quarter but inflation remains high. Yesterday's purchasing managers indexes (PMIs) showed companies faced dwindling orders and faster layoffs. But consumer prices rose at an annual rate of 2.7 per cent in September, the 22nd month that inflation has been above the ECB's target of just below 2 per cent, limiting its room to act.
The ECB has also said its record-low interest rates are not filtering through to households and companies, especially in troubled southern Europe where lending rates are much higher. It hopes the new bond programme will reduce borrowing costs.
The ECB said last month it would buy short-term debt of struggling euro zone countries such as Spain in return for commitments to reform. The news calmed financial markets but investors are keen to see how the programme works in practice.
Mr Draghi has stressed that it is up to governments to take decisive action, but he will nonetheless be quizzed on his assessment of the current negotiations on Spain.
He has to stick to his promise to help the euro zone despite criticism from the German Bundesbank which says the new programme is close to breaking the rule banning the ECB from financing governments.
"Given that the ECB's actions are hostage to the political debate, in particular the EU/Spain dialogue on Spain's request for EFSF aid, some news that Mr Draghi himself is encouraged by developments will go a very long way to provide support to the market," said G+ Economics' Komileva.
Additional reporting: Reuters
