RPT-ECB FOCUS-ECB faces lengthy wait for rate cuts to hit home

(Repeats story first filed on Wednesday, with no changes)

By Krista Hughes

FRANKFURT Jan 7 (Reuters) - If the European Central Bank was really hoping to start the new year with hard evidence that record interest rate cuts are helping the economy, it must be feeling disappointed.

ECB President Jean-Claude Trichet [ID:nLU207563] has batted back questions about the chances of another move this month by saying the bank was focussed on the impact of its 1.75 percentage points in cuts since October.

Yet indicators show little sign that euro-zone households and businesses are feeling the full benefit.

Average corporate borrowing costs have actually increased in the last few months, judging by corporate bond yields, and persistent financial market tensions are also dulling the pass-through of lower official rates to the real economy. (See [ID:nL798350] for factbox)

Meanwhile, with the euro zone economic outlook worsening by the week and inflation already well below the ECB's 2-percent ceiling, having fallen to 1.6 percent in December, the ECB may have little time to wait and see.

"Arguing that they have to wait until the previous rate cuts find their way into the real economy -- they cannot mean it seriously because they know there is not enough time," said UniCredit bond strategist Kornelius Purps.

A Reuters poll this week showed 55 of 70 analysts expect the bank to cut rates by half a percentage point to 2.0 percent on Jan. 15, although 15 expect it to wait until February.[ECB/INT]

The rule of thumb is that rate changes take from 12 to 18 months to have a full impact on the economy, although ECB policymakers including Vice-President Lucas Papademos have said the time lag is probably even longer at the moment.

In a bid to speed up the process, the ECB is lending banks all the money they want for up to six months at its benchmark rate, which is more than 3 percentage points cheaper than the rates paid at the last long-term auction in early October, among other moves to boost liquidity flows.

The new measures have helped drive down the cost of benchmark bank-to-bank lending EURIBOR= by more than 2.5 percentage points in the last three months and the spread of three-month LIBOR rates over anticipated central bank rates has narrowed by around a third, although it remains high.

BANK RATES STILL HIGH

Barclays Capital economist Julian Callow said it was too early to tell how much of this relaxation in wholesale rates banks would pass on to their customers, noting that spreads and market rates were abnormally high in September and October.

"The fact that since then we have fallen back very sharply is not a reason to think that the rates that banks charge will fall back as sharply," he said.

So far euro-zone banks have not followed the example of Britain's Nationwide in flatly refusing to pass on further cuts in official rates, although permanent tsb, the banking unit of Irish Life & Permanent (IPM.I), said high interbank rates might crimp its ability to do so in future.[ID:nL2216382][ID:nL520544]

The ECB is due to release figures on bank interest rates for November on Jan. 12, but the evidence of pass-through so far is less than encouraging.

Although Germany's Commerzbank (CBKG.DE) is offering 10-year fixed mortgages at 4.23 percent, compared to the euro-zone average of 5.37 percent in September, Spanish banks advertise rates around 6 percent for variable-rate mortgages, little changed from three months ago. Malcolm McDowell, head of economic affairs at the European Mortgage Federation, said banks could not afford to pass on the full rate cuts immediately, given pressure on profit margins.

"They cannot completely reduce their own rates in the same way that the ECB rates have been," he said.

"Given that capital markets are still not functioning they rely more on retail deposits to access the funding, they have to remain competitive with their savings rates."

UniCredit's Purps said the price of funds in euro wholesale markets was also largely irrelevant when there was little turnover, which was hampering access to funding.

"The interbank lending business is still dead," Purps said. "Companies have difficulty obtaining funds they need."

"In a normal environment we would see increased lending, increased investment activity, a broadening of the credit base but these are not normal times."

ECB figures show growth in loans to the private sector came to a virtual halt in November, the weakest monthly result on record, and firms also face problems raising funds on the open market. [ID:nLU145643]

According to Citi's Euro Broad Investment grade index, companies' average cost of raising funds on the market has risen in the last few months, with the yield on investment-grade bonds up from 5.695 pct in September to 6.054 percent in January.

Citi credit strategist Hans Lorenzen said the decline in official and government bond rates was accompanied by falling risk appetite and a widening gap between corporate and government yields.

"The corporate sector's cost of funding has not come down at all in the period when the ECB has been easing, simply because the credit risk premium has gone up," he said.

"For corporates, the overall cost of funding is still higher now than it was in September." (Additional reporting by Natalie Harrison in London, Niclas Mika in Amsterdam and Ben Harding in Madrid)