Euro Rates Seen on Hold, Bond Buying Plan Expected

The European Central Bank is expected to keep euro zone interest rates unchanged on Thursday, say it sees faint signs of economic recovery, and fill in some of the missing details of its unorthodox plan to buy bonds.

Eighty-one of 82 economists polled by Reuters forecast the ECB would leave the refinancing rate at 1.0 percent, and the Governing Council will probably repeat that rates are appropriate at the current record low.

The ECB is likely to refrain from any new policy steps so it can take stock of its unconventional measures to tackle the euro zone recession — last week's injection of almost half a trillion euros of ultra-cheap funding into money markets, and the soon-to-be-launched program to buy 60 billion euros' worth of mortgage and public debt-backed bonds.

"I don't think they will change rates and I don't expect any more non-standard measures," said Citi economist Juergen Michels, who predicts rates will stay on hold well into next year.

"I don't think they will shut the door on further moves, but I don't think there will be anything else unless there is another major downturn in the economy," he said.

Policymakers gather in Luxembourg this month for one of the Council's two meetings a year away from Frankfurt.

They will announce their rate decision at 1145 GMT and President Jean-Claude Trichet will explain it at a news conference at 1230 GMT.

Analysts will scour Trichet's comments on the ECB's latest view of the economic situation.

AP

As well as hints on the likely timing of a credible recovery and interest rate moves, focus will also be on any more details of the ECB's purchases of covered bonds, which are due to start this month.

"What we still want to know is when exactly the ECB is going to buy them, how much they are going to buy in each product, from whom and at what price," said Ted Packmohr, a covered bond analyst at Dresdner Kleinwort.

"There is still also the question (of) which non-euro zone banks will be able to participate via their European subsidiaries."

Worst Is Over?

Despite rising unemployment, tightening credit conditions and the risk of deflation, the latest economic data suggest the worst of the economic tempest may now have passed. Business and consumer morale in the 16-country region improved more than expected last month and manufacturing activity contracted slightly less than initially thought.

However, other signals point to a puny recovery at best.

The supply of credit to firms and consumers has continued to tighten, euro zone prices fell in June for the first time since the introduction of the euro and GDP slumped 4.8 percent year-on-year in the first three months of the year.

Analysts expect Trichet to stick to the view that there are tentative signs of stabilization in the economy and continue to downplay the threat of deflation. At the same time recent comments suggest key policymakers are becoming increasingly concerned about the credit situation.

Despite successfully pumping 442 billion euros into euro money markets last week the signs are not yet encouraging. Data on Wednesday showed that institutions are hoarding much of that cash at present, rather that lending it out as hoped.

"Gonzalez Paramo raised it and Axel Weber was clearly threatening last week when he said if banks don't pass on this cheaper funding then they will have to be bypassed," said Deutsche Bank economist Mark Wall.

"So the question is at what point does the ECB conclude that the banking sector is dysfunctional? And at what point do they decide that they need to switch strategy?"

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