ECB to hold fire on rates but could move soon

The European Central Bank will keep its gunpowder dry at its monthly meeting Thursday, but could pave the way to act soon if deflationary dangers persist, analysts said. ECB watchers are not expecting any further reduction in eurozone borrowing costs, which have been held at an all-time low of 0.25 percent since November. "We expect no ECB action tomorrow," said Berenberg Bank economist Christian Schulz. The ECB's decision-making governing council is meeting in Brussels, instead of its usual venue of Frankfurt. And at the monthly post-meeting press conference, president Mario Draghi "will likely leave the door wide open to easing in June without actually pre-announcing it", Schulz said. "The systemic euro crisis is over, the economy returned to trend growth in early 2014, leading indicators remain upbeat and credit constraints are easing. The data suggest no need for the ECB to act now," Schulz said. Oxford Economics economist Ben May agreed. "Recent news and comments suggest that an interest rate cut in May is unlikely. But a reduction within the next few months is still a distinct possibility," the economist said. UniCredit economist Marco Valli felt that while there would be no policy change on Thursday, "in June, some policy response appears more likely than not, if anything because the ECB would risk damaging its credibility if it remains completely inactive". While area-wide inflation picked up slightly to 0.7 percent last month, it still fell short of forecasts and was way below the ECB's target of just below 2.0 percent. That means the central bank will likely downgrade its inflation forecast when it unveils its latest updated forecasts, also on Thursday. At the moment, deflation is perceived to be the biggest threat to the eurozone's economic recovery. Deflation is a general decline in prices and can be highly damaging if consumers, expecting prices to fall further, hold off purchases. - Other options eyed - ECB chief Draghi has repeatedly stated that the bank sees no such dangers at present. But he insisted last month that the bank would act if they emerged. In addition to cutting its interest rates, the ECB could ease monetary conditions by pumping money into the system or buy up government bonds to bring down borrowing costs. ING DiBa economist Carsten Brzeski said that "when considering next steps, the ECB will carefully weigh all instruments on feasibility and effectiveness". While outright quantitative easing, as practised by the US Federal Reserve, was "still out of the question... some small support for the ABS (asset-backed securities) market or a final rate cut, possibly combined with new liquidity measures ... are in our view the ECB's preferred first line of defence", Brzeski said. The ECB and the Bank of England last called for easier rules regarding ABS so as to get credit flowing again in the eurozone economy. Rules drawn up to prevent the financial crisis from recurring have been "unduly conservative" when it came to ABS, -- bundles of mortgage, small business and other loans that are packaged as securities and sold to investors, the ECB and BoE said. Jennifer McKeown at Capital Economics also said no policy changes would be seen on Thursday. "We expect a very dovish tone from Draghi to hint that such action might be taken at the June meeting. This could involve an interest rate cut together with more long-term loans to banks or even a programme of asset purchases," the analyst said. The Organisation for Economic Cooperation and Development issued its updated forecasts for the world economy on Tuesday. Its head of economic research Christian Kastrop, commented that the eurozone was "lagging" behind in terms of recovery. The OECD was recommending that the European Central Bank should reduce its key interest rate from 0.25 percent to zero and a possible "switch to a nominal negative rate" for overnight deposits with it, he said.