* All eyes on bond-buying hints from ECB chief
* ECB likely to hold fire for now
* Fed to stay on hold, too, awaiting data flow
By Alan Wheatley, Global Economics Correspondent
LONDON, July 29 Mario Draghi may not need to
show his money this week, but impatient markets will be
unforgiving if the European Central Bank chief does not flesh
out his dramatic promise to do whatever is needed to save the
Given the threat that the long-running euro zone crisis
poses to the global economy, Thursday's ECB policy-setting
meeting and subsequent news conference were always going to be
But they have become pivotal since Draghi vowed in London
last Thursday that "within our mandate, the ECB is ready to do
whatever it takes to preserve the euro. And believe me, it will
Specifically, Draghi said the ECB had a mandate to act if
diverging borrowing costs were disrupting the transmission of
monetary policy across the 17-country single currency area.
This is patently the case. The ECB's interest rate cut on
July 5 to 0.75 percent has failed to reduce the giddily high
cost of money for governments, banks and companies on the rim of
the bloc, notably Spain and Italy. Sovereign yields in Germany
and the Netherlands, by contrast, are negative.
Yet even as capital flees the periphery and euro zone output
shrinks, few economists think Draghi is ready to announce that
the ECB is resuming secondary-market bond purchases to lower
yields, a policy it has pursued in the past with limited
The assumption is that the ECB wants to share the burden
with the euro zone's government-financed rescue funds. Bond
buying is controversial in Germany and other creditor states,
which fear they take pressure off debtors to reform, and so
Draghi will need time to forge a political consensus.
"The chances are that the ECB will need longer to calibrate
its strategy. It will probably take at least until September for
the ECB to be able to launch a new programme," said Lena
Komileva, chief economist at G+ Economics, a London consultancy.
Komileva favours a radical plan whereby the ECB would sell
German bonds and buy Spanish and Italian debt to cap borrowing
premiums. "The pressure is on the ECB to think of a creative way
to tackle systemic fault lines in the euro area," she said.
As if the ECB needed reminding of the depth of the crisis,
figures on Tuesday are likely to show that the euro zone's
jobless rate rose to 11.2 percent in June from 11.1 percent in
"If we are not yet at a policy of 'growth at any price', the
importance ascribed to growth in political circles has certainly
increased - which gives political cover to monetary policy
action," Paul Donovan, an economist with UBS, said in a report.
But whatever strategy the ECB adopts, the economic fissures
in the euro zone, accentuated by the poor competitiveness of the
periphery, means growth is not about to come roaring back.
"Over a 10-year horizon I'm positive, but in the short run
it's got to carry on being painful," said Richard Barwell, an
economist with Royal Bank of Scotland in London. "We need to
condition ourselves to the fact that we're going to live with
this for a long, long time."
The United States is doing better than Europe but is hardly
a role model. Figures on Friday are likely to show that non-farm
payroll jobs rose 100,000 in July, up from 80,000 in June, while
the unemployment rate held steady at 8.2 percent.
Like America's 1.5 percent rate of economic growth in the
second quarter, that would be uncomfortably sluggish for
President Barack Obama, hoping for a growth spurt to boost his
re-election prospects in November.
But few think it would be weak enough to push the Federal
Reserve into a third round of asset purchases, dubbed
quantitative easing, to drive down borrowing costs and so
bolster businesses and consumer confidence.
Economists expect the U.S. central bank's policymakers, who
gather on Wednesday, to sit on their hands for now.
"If we get to the September meeting and the Fed, looking at
the latest data, sees the economy running at less than a 2 pct
GDP pace, they're likely to act," said Bill Adams, an economist
with PNC in Pittsburgh.
"We'll need to see a stronger job market, more in line with
expectations that we had coming into the year of sustained,
moderate growth, to move QE3 off the table," Adams added.