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PREVIEW-ECB to hold rates, preach caution on recovery talk

Published 09/02/2009, 06:46 AM
Updated 09/02/2009, 06:48 AM
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* Rate decision 1145 GMT Thursday, news conference 1230 GMT

* Analysts expect rates to remain on hold at 1 percent

* Likely to confirm rates are appropriate, risks balanced

* ECB staff expected to upgrade economic forecasts

By Marc Jones

FRANKFURT, Sept 2 (Reuters) - The European Central Bank is expected to keep interest rates at 1.0 percent on Thursday, and President Jean-Claude Trichet is likely to preach caution on the growing hype of a full-blown euro zone economic recovery.

With the 16-country bloc enjoying a speedier-than-expected rebound from recession, all 80 economists polled by Reuters forecast ECB policymakers would leave rates at their current record low for a fourth month running.

The Governing Council will have new ECB staff economic forecasts to digest at their monthly policy meeting.

Following surprisingly solid improvements in data, these are likely to show higher GDP than the last projections in June. If the inflation outlook is also revised up, the forecasts will be the first across-the-board upgrades since September 2006.

"Things are improving and numbers have been coming in better, but policymakers have made it clear that there is still some time before they can sound an all-clear," said Dirk Schumacher, Senior European Economist at Goldman Sachs.

"They will certainly be no rate change and they will keep their stance that there is no change needed to policy rates or any other measures."

Germany and France have already pulled out of recession and the overall euro zone economy contracted only 0.1 percent in the second quarter against the previous three months, following a 2.5 percent drop in January-March.

However, recent progress may lose momentum once governments and central banks around the world begin to take away the emergency support measures built up during the crisis.

Trichet is expected to give little away on any internal ECB planning on its exit strategy.

On interest rates, analysts expect him to repeat last month's view that the main refi rate is "appropriate", as is the 0.25 percent interest banks receive when they deposit cash overnight at the ECB, a level which is steering money markets at the moment.

Another hot topic will be the ECB's second handout of 1-year cash planned for September, and whether it offers banks the cash at 1 percent interest again or bumps up the price.

If the ECB did charge above 1 percent, markets would see this as a signal that Trichet and his colleagues expect rates to be higher in a year's time.

"The question is whether they add a spread or not," said Goldman's Schumacher. "Probably not in our view, but that is the main area of interest because it is likely to be where they start when they change their tone."

The ECB flooded the markets with a record of 442 billion euros in one-year funds in late June, which they are still digesting. The ECB has reserved the right to charge more than 1 percent in operations this month and in December.

(Reporting by Marc Jones; editing by David Stamp) marc.jones@thomsonreuters.com; +49 (0)69 7565 1219; reuters messaging: marc.jones.reuters.com@reuters.net))

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