* ECB rate decision 1145 GMT, news conference 1230 GMT
* Main refi rate expected on be on hold at 0.5 pct
* Draghi expected to talk down forward market rates
By Sakari Suoninen
FRANKFURT, Sept 5 Keeping rates on hold will be
the easy part of the European Central Bank meeting on Thursday:
the harder job will be chief Mario Draghi having to balance
talking up euro zone recovery and talking down market rates.
Recent economic data has come in relatively strong, largely
validating the ECB's main scenario of a gradual recovery taking
hold in the second half of this year and gathering pace in 2014.
However, a rise in forward market interest rates has already
caused consternation among the bank's policymakers. Draghi
cautioned last month that market expectations of an interest
rate rise are "unwarranted".
That verbal intervention did little good, and market rates
have continued to rise despite the warning and the ECB's July
assurance that it would keep its policy rates at current or
lower levels for an extended period of time.
Much of the market rate pressure is linked to the global
impact of the U.S. Federal Reserve heading towards cutting back
its stimulus programme - a dominant factor in global finance.
But a cacophony of policymaker views on what the ECB's first
stab at forward guidance actually means has diluted its impact
and analysts say the central bank's main challenge this month is
to make it more credible instead of lowering interest rates.
"A rate cut does not seem to be likely. Of course that
remains an option in the future," ABN Amro economist Nick Kounis
said. "Probably they'd get more mileage from strengthening the
All 60 economists in a Reuters poll expect the ECB to keep
interest rates at 0.5 percent at Thursday's meeting.
But it is far from clear that the 23-man Governing Council
can agree on a firmer formulation of guidance, either by giving
a time frame during which they will refrain from raising rates,
or a clear data point to be reached before a rate increase.
Even as the ECB is expected to keep rates on hold, Draghi is
likely to stress that a cut remains an option in the future,
confirming the downward bias on monetary policy.
In August, Draghi gave no indication the policymakers were
entertaining a chance of cutting rates further, which did not
help in keeping market rates from rising.
"Last time, one of the mistakes Draghi made was saying they
didn't even talk about a rate cut," Kounis said.
While waiting before any action, Draghi could stress the ECB
still has other tools, including another ultra-long-term
liquidity measure to tide banks over a potentially rocky period
of asset-quality review and stress tests over the next year.
Euro zone businesses had their best month in over two years
in August as orders increased for the first time since mid-2011,
a survey showed on Wednesday, suggesting the region's economy
will grow slightly this quarter after 0.3 percent growth in the
The Governing Council will also welcome the fact that
interest rates banks charge companies in debt-ridden southern
Europe are falling more than in core euro zone nations, even as
the gap between them remains wide.
Widely varying borrowing costs across the 17-country bloc
have developed into a major headache for the central bank, which
charges banks a flat 0.5 percent interest rate for loans.
In July, the interest small businesses have to pay fell most
in the debt-ridden countries and the central bank's measure of
country-by-country variation fell to its lowest level since
August last year.
However, the amount of money euro zone firms borrowed fell
at its fastest pace since the inception of the euro in July.
Weak lending, combined with rising market rates, will keep
the ECB from putting a much happier face on the growth outlook
in its latest set of staff economic projections to be published
on Thursday, and Draghi is expected to emphasise that the growth
outlook is still subject to downward risks.
"Draghi will be very cautious on the growth outlook, repeat
what they have said before, that they are on track with a very
gradual recovery," Societe Generale economist Anatoli Annenkov
Analysts also expect the inflation outlook to remain close
to current levels, showing no price pressures as it is expected
to remain below the ECB's target of just below 2 percent.
"We are not expecting much change in the inflation outlook,
next year's inflation estimate should be 1.3 or 1.4 percent,"
SocGen's Annenkov said.