Spanish banks expected to seek bail-out after further inquisition

Spain will face further inquisition from investors this week amid speculation the country will finally ask for a bail-out.

The European Central Bank is holding a rates meeting on Thursday, and while no action is expected, governor Mario Draghi will still front a press conference afterwards, so there may be some commentary for markets to latch on to as the week ends.

Craigs Investment Partners broker Peter McIntyre said there was nothing else significant on the agenda from Europe this week, although markets would digest the Spanish banking stress test that came out over the last couple of days.

"The outcome of the tests was that the banks need €60 billion ($NZ93 billion) of capital, which is less than the €100 billion that the rest of Europe had agreed upon to recapitalise the Spanish banking sector."

However, there were still plenty of cynics who saw €60 billion quickly turning into a bigger number, he said.

The housing market continued to fall, growth expectations in Spain still looked too high and questions remained over whether the stress tests were stressful enough.

"Still, it's another hurdle that we've passed before the inevitable Spanish bail-out, so markets seem to be net positive on this news," Mr McIntyre said.

Other central banks in the spotlight this week were the Reserve Bank of Australia, the ECB and the Bank of England, all due to announce their policy rates.

ASB economist Christine Leung expected the ECB to announce a 0.25% cut to its official interest rate, taking the refinance rate down to a record 0.5%.

European data continued to be soft and a stabilisation in economic activity is not expected until next year.

The Bank of England was not expected to announce additional stimulus measures, but it was expected to retain an easing bias in light of continued challenging economic conditions, she said.

Reports from Australian economists were mixed yesterday on whether the Reserve Bank there would cut its rates today from the current 3.5%.

Most of the market is pricing in a 0.25% cut today and a further 0.25% cut in November, but some have the next cut of 0.5% coming in November and the cash rate staying unchanged today.

Australian inflation stayed low in September, giving the central bank scope to cut its interest rate again. Underlying inflation, which excludes volatile monthly price movements, remained flat in September.