* ECB rate decision 1245 GMT
* Expected to keep interest rates at 0.75 pct
* Draghi news conference 1330 GMT
* Focus on economic outlook, bank lending
By Sakari Suoninen and Eva Kuehnen
FRANKFURT, Jan 10 The European Central Bank is
expected to keep interest rates at a record low of 0.75 percent
on Thursday, refraining from a cut as the euro zone economy
shows some signs of stabilising and inflation still tops its
The 17-country euro zone is in recession, but recent data
points to some stabilisation, and ECB President Mario Draghi
could strike a slightly more positive tone in the news
conference that follows the rate decision.
"Rates are definitely on hold. Nothing has been spectacular
enough in recent data to force the ECB to any action," Deutsche
Bank economist Gilles Moec said.
"There is a recession, but no further deterioration. Lending
is weak, but also not deteriorating further, so the ECB is not
compelled to act."
The 23-man Governing Council will find some comfort from
improving business morale as well as a survey of purchasing
managers, which gave tentative signs that the worst of the
downturn may have passed.
"Since the December meeting key figures have generally
surprised on the upside," Nordea analyst Anders Svendsen said in
a note to investors.
While the ECB had, in Draghi's words, "a wide discussion" on
reducing rates last month, the grounds for such a move have not
grown and Executive Board members have argued against a cut.
Yves Mersch said last month he did not see the logic of a
debate about the ECB cutting its main rate and Peter Praet said
there was little room to cut.
Another cut of the refinancing rate would raise the question
of whether the ECB would also lower its deposit rate - currently
at zero - by the same amount, which would push it into negative
territory, essentially charging a fee, for the first time.
Even though Draghi has said the bank was "operationally
ready" for such a step, it has grown increasingly wary of the
idea over the past couple of months, a source with knowledge of
the ECB's thinking said.
Negative deposit rates could deal a hefty blow to money
market funds, which have already seen cash outflows since the
ECB cut the deposit rate to zero in July. The rate is a peg for
short-dated money market rates and at zero it is already almost
impossible for funds to generate a return for their investors.
Executive Board member Joerg Asmussen said last month he
would be "very reluctant" about the ECB cutting the deposit rate
any further, adding that "our (monetary) policy is very
ECB staff projections published last month saw inflation at
about 1.4 percent in 2014, which would usually justify another
interest rate cut.
The central bank also sees inflation falling below 2 percent
this year with underlying price pressures remaining moderate.
But inflation has eased more slowly than the ECB initially
expected and as long as it misses the target - it has been above
2 percent for more than 2 years - a cut could be difficult to
Furthermore, in the euro zone's largest economy, Germany,
prices rose faster in December than in the previous month.
In addition to gauging whether the ECB is entertaining
another cut or not, Draghi will be pressed on what other options
the ECB has, especially to improve lacklustre bank lending.
ECB data showed last week that bank lending to the private
sector fell at an annual rate of 0.8 percent in November.
At his December news conference, Draghi attributed the drop
mainly to demand factors, but added that in a number of
countries, credit supply is restricted.
A move by global regulators to give banks more time and
flexibility to build up cash reserves is expected to do little
to support a recovery in Europe, where recession-hit firms and
households have scant appetite for more debt.
"One thing the ECB needs to engineer is recovery in
lending," Rabobank economist Elwin de Groot said.