- What: ECB to decide on interest rates, exit steps
- When: Thursday March 4. Rate decision 1245 GMT, news
conference 1330 GMT
- Reuters forecast: All 87 economists polled expect rates on
hold at 1 pct, and 24 of 31 money market traders said the ECB
should extend full allotment for loans. [ECB/INT]
FRANKFURT, March 1 The European Central Bank is
set on Thursday to unveil the next steps in its gradual
withdrawal of emergency lending measures put in place to support
banking at the height of the financial crisis.
Economists expect the central bank's regular meeting will
keep interest rates unchanged and the focus to be squarely on
liquidity conditions heading into the third quarter, when banks
must repay a massive 442 billion euros in 12-month funds.
Below are some possible outcomes of the meeting.
KEEP INTEREST RATES UNCHANGED
Economists were unanimous in their expections of no change
to rates this month, and most do not expect any rise in
benchmark credit costs until the fourth quarter. At his news
conference, ECB President Jean-Claude Trichet is likely to say
rates are appropriate and the inflation outlook remains subdued.
MARKET IMPACT: Little
EXTEND FULL ALLOTMENT FOR ALL OPERATIONS INTO Q3
The ECB has promised to keep its policy of unlimited funds
at fixed rates until April 13 for weekly lending oprations, and
until the end of March for longer-term operations. Given
expectations for weak growth in the first quarter and worries
about Greek debt, some policymakers are pushing for current easy
liquidity conditions to be extended. But others would prefer to
keep up the momentum around the exit.
MARKET IMPACT: Likely to push up the euro initially. Would
help keep LIBOR market interest rates low, and the front end of
the bond yield curve would be practically unchanged.
PUT LIMITS ON ACCESS TO THREE-MONTH LIQUIDITY
Returning three-month liquidity operations to an auction
process while keeping up full allotment over shorter periods
would encourage a shortening of the maturities of outstanding
loans, a further step towards normal conditions, while making
sure banks can still meet funding needs. Still, any suggestion
the ECB is withdrawing support more quickly than markets can
cope with would set off alarm bells.
MARKET IMPACT: Likely to flatten the bond curve by five
basis points in the two- to five-year curve, as 2-year yields
would rise. Likely to be neutral for the euro as long as
unlimited funds are available over shorter periods.
MAKE ONE-MONTH OPERATIONS PERMANENT
Several officials have said the ECB is likely to make
one-month lending operations a regular part of its operations.
Keeping these up at full allotment would offset any move to
limit access to three-month funds.
MARKET IMPACT: Little.
INDEX RATE AT 6-MONTH OPERATION TO REFI RATE
The ECB introduced a tracker rate for its December 12-month
loan and officials have said they may follow a similar approach
for the last six-month operation, at which traders expect demand
of about 35 billion euros.
MARKET IMPACT: Little. Markets have coped with indexation at
the 12-month operation and expect a similar approach.
NEW STAFF FORECASTS BROADLY IN LINE WITH DECEMBER
ECB staff in December forecast growth of about 0.8 percent
this year and 1.2 percent in 2011, while inflation was seen at
about 1.3 percent this year and 1.4 percent in 2011. European
Commission forecasts released last week were broadly similar.
MARKET IMPACT: An upward revision to growth and inflation
would likely increase bets on rate hikes and push the front end
up by about 10 basis points. Lower numbers could push short-term
yields down by about 5 basis points or more.
URGE GREECE TO KEEP WORKING TOWARDS BUDGET TARGETS
The ECB has so far said it approves of Greece's goal to cut
its budget deficit to below 3 percent by 2012 and expects it to
be met, while stressing that no special help will be forthcoming
from the ECB.
MARKET IMPACT: Support from the ECB after last week's visit
by officials would likely support the euro EUR=, which has
been under pressure due to fears of Greek default.
SAY GREECE'S BUDGET TARGETS DIFFICULT TO MEET
MARKET IMPACT: Such a blunt expression of no-confidence in
Greece's budget reform plans would likely send the euro dropping
towards $1.30. The German bond yield curve could steepen by
about 10 basis points and the spread between Greek and benchmark
German yields would likely increase.
(Reporting by Krista Hughes and Sakari Suoninen; editing by