* ECB expected to keep interest rates at 0.75 pct
* May loosen collateral framework to revive lending
* Rate decision due at 1145 GMT, press conference 1230 GMT
By Eva Kuehnen
FRANKFURT, April 4 The European Central Bank is
expected to keep interest rates unchanged on Thursday but
investors will be looking for any signs it is preparing for a
cut in coming months to help lift the euro zone out of
Despite a recent drop in economic sentiment and falling
inflation, a Reuters poll of 73 economists showed little change
in expectations, with rates set to remain at 0.75 percent -
tiny, but still the highest level among the world's major
As the world recovers from the financial crisis, the ECB has
lent less support to the economy than its peers in Japan, the
United States or Britain, who have launched massive asset
purchase programmes and cut rates closer to zero.
Japan went a step further on Thursday. The Bank of Japan's
new governor, Haruhiko Kuroda, shocked markets with a radical
overhaul of its policymaking, adopting a new balance sheet
target and pledging to double its government bond holdings in
two years as it seeks to end nearly two decades of deflation.
The unexpected scope of the changes drove the yen lower and
knocked the 10-year bond yield to its lowest in a decade.
Earlier in the week, ECB Executive Board member Benoit
Coeure had warned against countries directly pursuing overt
competitive devaluations, especially if other central banks had
limited room to manoeuvre.
Japan's moves are designed to push inflation higher, lifting
the country out of decades of deflation and minimal growth.
Less is expected of central bank meetings in Europe where
the Bank of England concludes its policy meeting at 1100 GMT and
is expected to wait with further bond buys.
The ECB itself is unlikely to go down a similar path to its
international peers at its policy meeting, which began early on
Thursday, not even to boost lending to households and companies
in the euro zone periphery, which so far enjoy limited benefit
from record-low ECB rates.
"Apart perhaps from loosening some of the collateral rules
again, we don't expect that the ECB is yet ready to launch into
any programmes in terms of purchases of assets," said Citi
economist Guillaume Menuet.
"The Governing Council will be mulling over a change of tone
to prepare investors for an easing of monetary policy later in
the quarter," said Menuet, who had pencilled in a 25-basis point
cut in the main refinancing rate for May or June.
After early signs of stabilisation in the euro zone economy
at the start of the year, March marked a set back as Cyprus
narrowly escaped a financial meltdown by securing a last-minute
bailout and Italy struggled to end a post-election deadlock.
Euro zone economic sentiment fell after four months of
gains, surveys showed manufacturing across the bloc fell deeper
into decline and inflation eased to 1.7 percent, departing
further from the ECB's target of below, but close to 2 percent.
One month's readings will not be enough to change the ECB's
policy stance, but any indication of heightened concern about
growth prospects or the inflation outlook will not go unnoticed
ECB President Mario Draghi's post-meeting news conference.
Draghi will also likely be asked by journalists whether the
Cyprus rescue deal that for the first time penalised large bank
depositors will serve as a model for future bank bailouts,
something some ECB policymakers have denied.
ECB Governing Council member Ewald Nowotny two weeks ago
doused hopes for further cuts, saying in the current situation
lower interest rates would not have much of an effect. His
colleague, Yves Mersch, made similar comments last week.
The ECB's main worry is that its low rates are not reaching
households and firms in the euro zone periphery, mainly because
banks' funding costs in crisis stricken countries are higher
than those in the core countries, pushing up loan costs.
This affects small and medium-sized enterprises (SMEs) in
particular as they have few alternatives to bank funding.
Draghi said after the March policy meeting that the ECB was
studying options to address the issue, but that they were not
planning "anything special". Since then, several policymakers
have said a number of options were being looked at.
Nowotny said one plan was to package SME loans, but rejected
suggestions the central bank could buy them directly, saying
instead that the ECB would work through the banking system.