Central Banks to hold fire... for now

LONDON (Reuters) - The intensifying euro zone crisis and uncertain global growth outlook have raised hopes for a policy response from major central banks but, while it could be a close call, they are likely to resist pressure to act in the coming week.

The European Central Bank, the Bank of England and the Reserve Bank of Australia are all due to meet as data emerges on the euro zone's service sector, and the manufacturing and trade performances of the big German and U.S. economies.

The main focus will be Wednesday's ECB meeting, and whether dramatic selling of peripheral European government debt by investors in May and a flight into safe-haven U.S. Treasuries and German government bonds will prompt it to act.

One reason to doubt a major shift in policy is that, even after U.S. Treasury 10-year notes hit yields not seen in more than two centuries of record keeping, and investors began paying the German government for the right to hold its debt, the move across all markets may not warrant it.

"The stresses appear not yet to be big enough across all asset classes for the policymakers to react," said Richard Batty, global investment strategist at Standard Life Investments.

"It all seems to be playing out in investor's appetite for triple-A government bonds and for the dollar, but there doesn't seem to be the volatility or sharp falls in equity markets or other stresses in the system, such as the funding market."

In Europe, the spread between three-month Libor rates and overnight rates, seen as a measure of health of the banking system, has been stable throughout May - mainly due to the more than one trillion euros of cheap funds injected into the system by the ECB in December and February.

And while May was a bad month for equity markets everywhere and Spain and Italy in particular, the widely watched Dow Jones .DXY and S&P 500 .SPX indexes remain in positive territory for the year to date.

Those gains were under threat on Friday, however, as disappointing May U.S. jobs data sparked heavy selling, sending the MSCI world equity index .MIWD00000PUS back to where it started the year.

The VIX index .VIX, often referred to as the market's fear gauge stood at 25 points, in line with its levels of last December but well below the 48 points seen at the height of last year's market turmoil in August and September.

POLITICAL MOVES

A heavy calendar of events throughout June which could help determine how the euro zone crisis unfolds may also encourage Europe's key monetary policymakers to hold fire.

Greek elections are due on June 17, following a first round of French parliamentary elections on June 10. The heads of the G20 group of nations will hold a summit on June 18 and 19, while Europe's leaders gather at the end of the month to decide their next response to the crisis.

But pressure is growing for action from the ECB to calm acute nervousness about a potential Greek exit from the currency bloc, and fears that the cost to Spain of saving its fragile banks will mean the country itself has to be rescued.

"The ECB is currently the only institution that can credibly counter a collective loss of confidence on the scale we're now witnessing," said Nicholas Spiro, Managing Director at debt consultancy Spiro Sovereign Strategy.

Spanish bond yields have surged in the past week to near their highest level since the launch of the euro, raising questions about the country's ability to fund itself over the longer term without outside help.

Spain will provide a big test of investor sentiment when it auctions more government bonds on Thursday as its 10-year bond yields hover around 6.5 percent - close to the 7 percent level at which other indebted countries have been forced to seek aid.

The latest Reuters poll of economists found most still expected the ECB to resist pressure to cut interest rates before the end of next year, but that majority has shrunk from previous polls as gloomy economic data rolls in. Just 11 of the 73 respondents expected the bank to cut rates on June 6. <ECB/INT>

The Bank of England is also expected to resist calls to pump more money into the depressed UK economy when it meets on June 7, according to a separate Reuters poll, although it found there was an even chance the central bank would restart the printing presses at some point in future. POLL3

A slim majority of economists expect Australia's central bank to keep interest rates unchanged on Tuesday, but this is an even closer call as a growing number of banks, including the nation's top four, are calling for a cut. AURATE1

Meanwhile, the U.S. Federal Reserve Board's mid-month policy meeting and the end of its current easing policy, known as 'Operation Twist', could also bring changes.

"With dark clouds gathering over the global economy and the euro area crisis intensifying, the ‘Great Monetary Easing Part 2' looks set to accelerate again as many major central banks around the globe are gearing up for more action in the next month or two," said Manoj Pradhan of Morgan Stanley.

(Editing by Catherine Evans)