ECB May Keep Rates at Record Low to Nurture Nascent Recovery

By Jana Randow

Sept. 3 (Bloomberg) -- The European Central Bank will leave interest rates at a record low and signal it’s in no rush to withdraw emergency stimulus measures as the economy shows signs of recovering from its worst recession since World War II, economists said.

ECB officials meeting in Frankfurt today will keep the benchmark rate at 1 percent, according to all 58 economists in a Bloomberg News survey. The central bank, led by President Jean- Claude Trichet, won’t raise rates before the third quarter of 2010, another survey shows.

The ECB is wary of nipping the nascent euro-region recovery in the bud by tightening policy too soon. While the bank is likely to raise its forecasts for economic growth today after Germany and France unexpectedly exited their recessions in the second quarter, rising unemployment and the expiry of government rescue packages may damp expansion next year.

“The ECB will acknowledge that the recovery is going well and that we’ll see an early return to growth,” said James Nixon, chief European economist at Societe Generale SA in London. “But they won’t be swinging from the rafters.”

The ECB announces its rate decision at 1:45 p.m. and Trichet will release the revised economic forecasts during a press conference 45 minutes later. Economists will also watch for any comments on the ECB’s 12-month loans to banks, which could reveal “a lot” about its broader policy intentions, said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London.

G-20 Talks

Trichet will discuss the next step in the global response to the financial crisis when he meets officials from the Group of 20 nations in London from tomorrow. While the Federal Reserve and Bank of England are pumping money directly into their economies through the purchase of government and corporate bonds, the ECB has focused on lubricating bank lending in an effort to rekindle growth.

In June it offered lenders as much cash as they wanted for 12 months at its benchmark rate, resulting in a record allotment of 442 billion euros ($629 billion). Trichet has kept open the option of charging a higher interest rate at the next 12-month tender on Sept. 29.

“If they added a premium they’d imply a rate hike was coming sometime next year,” said Cailloux. “But at the moment it seems the Governing Council has no willingness to signal it is moving anywhere close to a normalization of policy.”

ECB council member Ewald Nowotny said on Aug. 31 that Europe can avoid a double-dip recession as long as policy makers don’t remove stimulus measures too soon. Even then, rising unemployment may suppress growth “for some time,” he said.

Rising Unemployment

Euro-area unemployment rose to 9.5 percent in July, the highest since 1999. That may weigh on household spending just as government subsidies designed to encourage consumption start to expire.

In Germany, a 5-billion-euro ($7.1 billion) “cash-for- clunkers” fund ran dry yesterday. Under the plan, consumers received a 2,500-euro payment when they traded in an old car and bought a new one.

Government stimulus programs helped Germany and France return to growth in the second quarter and limited the decline in euro-region gross domestic product to just 0.1 percent.

With a global recovery bolstering demand for European exports, economists predict the economy of the 16 euro nations will expand this quarter.

European economic confidence increased twice as much as economists forecast in August, and the region’s manufacturing and service industries almost ceased contracting.

Revised Forecasts

L’Oreal SA, the world’s largest cosmetics maker, said on Aug. 27 that sales improved in July and will keep recuperating gradually in the second half of the year. Voestalpine AG, Austria’s biggest steel company, said on Aug. 28 it’s ending shortened working hours for staff at its Linz plant after demand for flat steel rebounded “significantly.”

The ECB will today revise its economic forecasts to predict a smaller annual contraction for 2009 and expansion in 2010, said Stefan Schilbe, chief economist at HSBC Trinkaus & Burkhardt AG in Dusseldorf. In June, the central bank forecast gross domestic product would drop about 4.6 percent this year and 0.3 percent next year.

“The ECB will look into the future with a bit more optimism,” Schilbe said. “But an improvement in leading indicators doesn’t mean we’ll get a V-shaped recovery that requires an immediate policy response. There are good reasons to be cautious.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.