The European Central Bank is expected to announce Thursday that special lending to banks introduced during the financial crisis will be scaled back — even though recovery from recession is proving to be weaker than hoped.
Rates are expected to stay unchanged — and the bank may echo the U.S. Federal Reserve that though some emergency measures can be eased, the economy will be too weak for rates to rise soon.
For the third month running, Thursday's monthly news conference of the European Central Bank president Jean-Claude Trichet will likely be hijacked by questions about the crisis surrounding Greece's huge budget deficit in the wake of the government's latest batch of budget cuts.
The economic outlook, monetary policy and the debt crisis afflicting Greece are all connected though — most analysts think that partly as a result of the problems in Greece, the European Central Bank will keep its benchmark interest rate on hold at the record low of 1 percent for most, if not all of, this year.
"Greek default can be avoided but the ECB has gone from the front of the queue to raise rates to the back," said Kit Juckes, chief economist at ECU Group.
Though Greece has been hanging like a cloud above the European economy and economic policy-making, Trichet is expected to confirm that special liquidity measures introduced to prop up the banking system during the financial crisis and the recession will continue to be wound down.
Analysts think he will confirm that the upcoming auction of 6-month credits on March 31 will be the final operation and that the interest rate charged for shorter-term loans will be increased. The central bank introduced a range of cheap liquidity operations when the financial crisis first exploded to allow the commercial banks to have access to money at a time when the credit markets had seized up.
However, Trichet will likely stress that the gradual withdrawal of these liquidity measures does not mean that interest rates will be rising any time soon — the Fed's Ben Bernanke has been saying something similar with regard to U.S. borrowing costs.
In fact, with the ECB set to publish its latest economic forecasts, Trichet is expected to indicate that economic conditions remain difficult in the 16-country single currency zone and that the outlook remains clouded with uncertainty, especially amid the debt difficulties afflicting a number of countries.
With wage growth set to slow, governments poised to withdraw some of the stimulus measures introduced during the recession, such as car junking programs, and countries like Greece and Spain poised for big austerity measures, the outlook for consumption in particular does not look good.
"We doubt that the new ECB forecasts will paint a pretty picture and the upshot — again — is that interest rates should be on hold for much longer than markets currently anticipate," said Jennifer McKeown, senior European economist at Capital Economics.
The Bank of England is also expected to keep its benchmark interest rate on hold at the record low of 0.5 percent. All eyes though will be on whether the rate-setting Monetary Policy Committee asks to have its financial asset program extended.
However, with inflation above the Bank's 2 percent target and economic growth higher than previously thought, most analysts doubt an extension new be asked for — the Bank of England bought some 200 billion pounds worth of financial assets from the commercial banks, mainly bonds, to increase the money supply and get them lending again.
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