ECB May Keep Rates at Record Low as Outlook Grows ‘Less Gloomy’

By Simone Meier

Aug. 6 (Bloomberg) -- The European Central Bank will leave interest rates at a record low as it tries to get credit flowing again to strengthen an economy that may return to growth this quarter, economists said.

ECB officials meeting in Frankfurt today will keep the benchmark rate at 1 percent, according to all 52 economists in a Bloomberg News survey. The central bank, led by President Jean- Claude Trichet, will refrain from any further policy stimulus while it assesses the impact of its asset-purchase program and 12-month loans to banks, said Nick Kounis, chief euro-region economist at Fortis Bank in Amsterdam.

“The economy seems to be finding its feet sooner than the ECB expected, but a recovery is going to be gradual,” he said. “We’re moving from gloomy to less gloomy. They’re definitely not going to sound anywhere near euphoric.”

The economy of the 16 euro nations will expand 0.3 percent in the third quarter from the second, economists at Barclays Capital forecast, bringing an end to Europe’s worst recession since World War II. With unemployment rising and consumer prices falling at the fastest pace on record, the road to recovery may not be smooth. The euro area will be the worst performing major economy next year, according to the International Monetary Fund.

The ECB announces its rate decision at 1:45 p.m. and Trichet holds a press conference 45 minutes later. Separately, the Bank of England will probably keep its key interest rate at 0.5 percent today, a Bloomberg survey shows.

Credit Squeeze

The Bank of England, U.S. Federal Reserve and Bank of Japan have lowered borrowing costs to close to zero and started buying government and corporate bonds to rekindle growth. By contrast, the ECB has focused on getting credit flowing through the banking system again, arguing that two thirds of its economy is financed by banks.

The ECB in June lent banks a record 442 billion euros ($636 billion) for 12 months and will hold two more 12-month tenders this year. Last month it started a program to buy 60 billion euros of covered bonds, securities backed by mortgages and public-sector loans.

In the second quarter, a net 21 percent of banks reported a tightening in credit standards for enterprises, down from 43 percent in the previous three months, according to the ECB’s bank lending survey published on July 29. Still, loans to households and companies grew at the weakest pace on record in June.

‘Continued Pressure’

Deutsche Bank AG Chief Executive Officer Josef Ackermann said on July 28 he remains “cautious” about the economic outlook and expects to see “continued pressure on the credit environment.”

If banks remain reluctant to lend, the ECB may be forced to step up its response as the economic slump swells unemployment and prices decline. The jobless rate rose to 9.4 percent in June, the highest since 1999, and consumer prices posted a 0.6 percent annual decline in July, the biggest since data were first compiled in 1996.

Trichet last month refused to rule out further rate cuts, saying while the current level was “appropriate,” policy makers hadn’t decided they had reached their lower limit.

“The current stance is to monitor the impact of policy decisions that have been taken over the past months,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. “The latest information isn’t providing any sign that they would have to launch additional measures.”

‘The Worst Is Over’

European economic confidence rose to an eight-month high in July and the contraction in the region’s manufacturing and service industries slowed.

Adidas AG, the world’s second-largest sporting-goods maker, yesterday reported a smaller decline in second-quarter earnings than analysts had forecast, and CEO Herbert Hainer said “the worst is over.”

The ECB predicts the euro-region economy will contract about 4.6 percent this year and 0.3 percent in 2010. Inflation will average about 0.3 percent this year and 1 percent in 2010, it forecast in June. The bank aims to keep inflation just below 2 percent.

Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London, said the ECB is unlikely to “change the script” before September, when it publishes the next round of forecasts.

“I expect nothing, nothing, nothing” from today’s meeting, he said. “Interest rates are appropriate, and on the non-conventional front there won’t be anything new either. Council members could probably have saved the trip to Frankfurt.”

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net