The European Central Bank left interest rates on hold as thedebt crisis tightens its grip on the euro-area economy, increasingpressure on policy makers to deliver further stimulus.

ECB officials meeting in Frankfurt today kept the benchmarkinterest rate at a record low of 1 percent, as predicted by 49 of60 economists surveyed by Bloomberg News. Ten forecast aquarter-point reduction and one a half-point cut. With Europeangovernments struggling to fix a crisis that's engulfing Spain andcould force Greece out of the euro, economists say the ECB may soonbe forced to lower rates and introduce more liquidity support forbanks.

The Group of Seven nations yesterday agreed to coordinate theirresponse to Europe's turmoil, which has tipped at least eight ofthe 17 euro-area economies into recession and damped Europeandemand for foreign goods. ECB President Mario Draghi, who said lastweek the monetary union is “unsustainable” in its current form,could choose to withhold further stimulus until governments do moreto tackle the causes of the crisis.

“The central bank has very limited ammunition left and may havewanted to keep its powder dry,” said Nick Kounis, head of macroresearch at ABN Amro in Amsterdam. Still, “the ECB is likely toleave the door for rate cuts wide open in its press conference,” hesaid.

Draghi holds a press briefing at 2:30 p.m., when he will unveilthe central bank's latest economic forecasts. ECB officialsconvened a day earlier than usual due to a public holiday in someGerman states tomorrow.

G-7 finance ministers and central bankers discussed “progresstoward financial and fiscal union in Europe” on a conference callyesterday that focused on Spain and Greece, officials said.

European representatives “said they will speed up their effortsto resolve those problems, which was encouraging to us,” JapaneseFinance Minister Jun Azumi told reporters in Tokyo, adding “Japanis ready to provide support if there is anything we can do.”

The Reserve Bank of Australia cited Europe's crisis when cuttingits benchmark rate yesterday by a quarter point to 3.5 percent,while the Bank of Canada held its key rate at 1 percent. The Bankof England will announce its latest policy decision tomorrow amidspeculation it could increase asset purchases after the U.K.slipped back into recession.

New Projections

The ECB in March predicted an economic contraction of 0.1percent for 2012 and growth of 1.1 percent for 2013. Inflation wasprojected to average at 2.4 percent this year and 1.6 percent next.Economists said they expect modest downward revisions to both theinflation and growth outlooks today.

“The ECB might want to wait for further corroborating data toconclude that its second-half-of-the-year recovery expectations arechallenged,” said Silvio Peruzzo, an economist at Royal Bank ofScotland in London. “We do not exclude the possibility that the ECBmight pre-announce it this week, recognizing the increasingdownside risk to the economy.”

While the euro region narrowly avoided recession in the firstquarter, latest data suggest the economy is shrinking again.Unemployment has reached 11 percent, the highest level on record,and purchasing manager indexes show manufacturing and serviceindustries are contracting at a faster pace than they were when theECB last cut rates in December.

International Monetary Fund Managing Director Christine Lagardesaid in an interview with Sweden's Svenska Dagbladet published June4 that it's “clear” the ECB has room for another rate cut.

Economists said Draghi is likely to announce today an extensionof the ECB's policy of full allotment in its refinancingoperations, which has been the main plank of its crisis responsesince 2008.

The ECB has also pumped more than 1 trillion euros ($1.2trillion) in three-year loans into the banking system, and outgoingExecutive Board member Jose Manuel Gonzalez-Paramo said in aninterview on May 31 that the full effect of that measure has yet tobe felt.

Pressure on Governments

“We certainly expect Mario Draghi to underscore that the ECB hasnot run out of options yet,” said Elwin de Groot, senior marketeconomist at Rabobank Nederland in Utrecht. “However, letting gonow would remove any pressures on European policy makers to come upwith a set of structural solutions to this sovereign debtcrisis.”

U.S. President Barack Obama has criticized European governmentsfor not doing enough to arrest the crisis, now in its third year.Investor concern about political inaction drove Europe's Stoxx 600Index down 8 percent last month, fully erasing gains this year,while the euro has plunged to a two-year low against the dollar. Ittraded at $1.2490 today.

Billionaire investor George Soros said on June 2 that Europeanleaders, foremost among them German Chancellor Angela Merkel, havea three-month window in which to “correct their mistakes andreverse the current trends.”

Spain, which has resisted pressure to become the fourtheuro-area nation to seek a bailout, yesterday called for the firsttime for European funds to shore up its banks.

The spread between Spanish and German 10-year bond yieldswidened to a record 5.4 percentage points last week and the cost ofinsuring against default on Spanish sovereign debt rose to ahistoric high.

Greece will meanwhile hold fresh elections on June 17 that couldhand more power to parties opposed to the terms of the nation'srescue package and precipitate its exit from the monetaryunion.

Further economic weakness or market tension “may convince theECB to become more accommodative this summer,” said Nikolaus Keis,an economist at UniCredit Research in Munich. “While a rate cut andthe options for the provision of further liquidity will most likelybe discussed, the Governing Council is unlikely to reach consensusfor immediate action.”

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