The European Central Bank is poised to keep its key interest rate steady at a record low 1.0 percent on Thursday as policymakers shift into "post-crisis mode," analysts say. Economists agreed a change of rates is not on the cards and pointed to several factors ganging up against a long-awaited eurozone economic recovery.
"The strong euro exchange rate has joined a worsening labour market and credit crunch issues as the most prominent impediments," ING senior economist Carsten Brzeski said. But "the ECB will again buy time by saying nothing," he said. "Crucial decisions should only come in December," when the central bank releases its latest projections for growth and inflation.
On Tuesday, the European Commission hiked its growth forecast for the 16-nation eurozone economy to 0.7 percent next year and 1.5 percent in 2011 having previously predicted a contraction of 0.1 percent in 2010. On Monday, research group Markit said its PMI index assessing the health of the eurozone manufacturing sector rose to 50.7 points in October, the first time since May 2008 it showed activity expanding.
Unemployment however is set to rise to 10.7 percent next year and 10.9 percent in 2011, the EU commission said. Goldman Sachs chief European economist Erik Nielsen felt "policymakers at the European Commission and the ECB are moving towards 'post-crisis mode'," and noted the central bank was beginning to think about how to unwind exceptional measures it has taken to underpin the economy.
The most likely move is an end to one-year loans of central bank funds, although such an operation scheduled for December will likely still go ahead. "We also expect the ECB to introduce an extra charge for the December 12-month operation," Citigroup analyst Juergen Michels said. Reaching a peak in June with one-year loans of 442 billion euros (655 billion dollars) - the largest amount of funds ever provided in a single step - the policy has helped bring down interbank lending rates.
Key ECB directors Axel Weber, who is also the German central bank governor, and Lorenzo Bini-Smaghi have recently warned commercial banks that the central bank's extraordinary measures would not continue indefinitely. The ECB's latest bank lending survey has found meanwhile that household demand for mortgages has begun to pick up, which some economists say is a key sign of a turnaround.
Once the central bank is sure lending to households and businesses is back on track, and that the economy is growing on a durable basis, it can begin to consider raising its benchmark interest rate. Most analysts expect that to occur in the second half of 2010. In Britain meanwhile, the Bank of England also meets this week to mull lending rates but no change from its all-time low of 0.50 percent is expected. The US Federal Reserve is also tipped to leave its base lending rate at near-zero as well and maintain a trillion-plus dollar programme to underpin the recovery.
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