* ECB expected to keep rates on hold, no more stimulus
* Details of TLTRO loan programme in focus
* Clarity on forward guidance key for take up of TLTROs
* Draghi expected to keep door open for QE, clues eyed
By Eva Taylor
FRANKFURT, July 3 Attention will turn to the
details of the European Central Bank's new stimulus measures
when the ECB meets on Thursday, as the dust settles after the
extraordinary package was announced in June.
The 24-member Governing Council is unlikely to take fresh
policy action at its July gathering after cutting interest rates
to record lows last month - the deposit rate to below zero - and
revealing a 400 billion-euro ($545.62 billion) loan programme.
By offering banks four-year loans at ultra-cheap rates, the
ECB hopes to entice banks to lend more freely, particularly to
small- and medium-sized companies in the euro zone periphery.
But the programme's fine print has not been released yet.
"It is absolutely not clear how they (the ECB) will enforce
the conditionality of the loans," said Marco Valli, chief euro
zone economist at UniCredit. "It is difficult to do in practice,
because money is fungible."
Banks used large parts of the last round of cheap ECB
funding in 2011/2012 to buy higher-yielding government bonds.
The question is how the ECB will avoid similar behaviour this
time and steer the money towards company loans instead.
Clarification on how long the ECB intends to keep interest
rates low will be a key to take-up of the loans, called targeted
long-term refinancing operations (TLTROs).
The head of Italy's main banking association ABI, Antonio
Patuelli, has already said he i convinced the programme will be
a success, particularly in Italy.
PROSPECT OF QE
So far, the decision to lower the deposit rate below zero -
in effect, to charge banks for parking their excess money at the
central bank overnight - has not yet reanimated money markets,
but it is helping to keep short-term rates low and steady.
The euro is trading below $1.37, roughly where it was
when the ECB met on June 5 but down from over $1.39 before the
ECB flagged the cut in May. The ECB is keeping a close eye on
the euro to gauge its impact on already low inflation.
Euro zone inflation stood at 0.5 percent in June, well below
the ECB's medium-term target of just under 2 percent.
Should the outlook for inflation deteriorate, President
Mario Draghi said, the ECB would consider quantitative easing
(QE) - essentially creating money to buy government or private
debt from banks, to keep borrowing costs low and boost spending.
Draghi is expected to keep the door open for such steps, but
the threshold remains high despite pressure from the
International Monetary Fund and the French government to be more
aggressive in easing monetary policy to stimulate growth.
"The outlook would need to change materially," Nordea
analysts Suvi Kosonen and Jan von Gerich wrote. "It will be late
this year, at the earliest, before the ECB has any clearer
picture of what its recent easing package can do."
($1 = 0.7331 Euros)