* ECB seen holding rates, only slim chance of cut
* 12-month lending ops, new covered bond programme eyed
* Last Trichet meeting may confirm U-turn on rates
* Rate announcement at 1145 GMT, news conference at 1230 GMT
(Updates with meeting started)
By Eva Kuehnen
Frankfurt, Oct 06 European Central Bank
President Jean-Claude Trichet is expected to prepare the ground
for a pre-Christmas interest rate cut at his final policy
meeting on Thursday and offer banks further protection against
the euro zone's worsening debt storm.
The ECB is widely expected to keep rates unchanged at 1.5
percent at its meeting in Berlin, which is now under way, but
calls for a cut have grown louder in recent weeks amid signs the
euro zone economy is deteriorating further and as Greek default
fears weigh heavily on confidence in the bloc's banks.
In a Reuters poll late last week, 56 of the 76 economists
questioned saw rates being left unchanged, while 20 expected a
Since then things have soured further. On Tuesday,
French-Belgian municipal lender Dexia SA became the
first European bank to bailed out due to debt crisis problems.
"I think it is really finely balanced," said Nomura
economist Jens Sondergaard. "The reason why we're not moving to
a formal rate cut is that they (ECB) have a tendency to prepare
the ground first."
"It seems a very sudden U-turn to go from upside risks to
inflation to balanced risks to inflation and then to a rate cut.
Has the world really changed that significantly in the last two
At its September meeting, the ECB changed course and put its
rate hikes -- started in April as the first of the major central
banks -- on hold, saying euro zone inflation risks were no
longer skewed to the upside, but were now "broadly balanced".
Since then, signs that the economy is stalling have grown.
Goldman Sachs now expects the euro area to slide into a "mild
recession" in the fourth quarter, as do others.
Oxford Economic Forecasting economist Tom Rogers said the
ECB should "cut interest rates below 1 percent should the
Eurozone head back into recession," adding that it was the best
equipped to try to buffer the impact of a slowdown.
In a full-page newspaper advert, French asset manager
Carmignac Gestion, which has about 55 billion euros under
management, asked Trichet to go further and cut rates "to zero"
and buy unlimited amounts of countries' distressed debt.
"Farewell, you certainly won't be missed!" read the ad,
which looked like a letter to Trichet. "This will be your last
chance to leave on a positive note."
While some like Carmignac have criticised the ECB for not
doing enough to fight the sovereign debt crisis, others like the
Bundesbank have said the ECB has already gone beyond its limits
and is putting its independence at risk.
Recent proposals to resolve the crisis have included the
idea of turning the European Financial Stability Facility (EFSF)
into a bank that can tap the ECB for funds.
While Trichet himself on Tuesday said he opposed such
measures, markets will want to know the consensus ECB view as
change may be afoot with Mario Draghi set to take over as
president in November.
LIQUIDITY IS KING
The ECB will also probably opt to pump more liquidity into
the market before cutting rates, economists said.
Policymakers have given clear hints they are prepared to
bring back the ECB's 12-month tender last used at the end of
2009, and there have been suggestions it plans to resurrect its
programme for buying covered bonds.
The deepening crisis has already forced the ECB back into
emergency mode. It has reintroduced six-month euro funding, a
measure it had previously mothballed, and extended limit-free
funding in all its operations until at least mid-January.
"The re-introduction of a 1-year LTRO (lending operation)
seems to be the natural next step, and we would not be surprised
if Trichet were to hint at even longer LTROs if this were deemed
necessary," said Goldman Sachs economist Dirk Schumacher.
The ECB first bought covered bonds between 2009 and 2010 in
a year-long, 60 billion euro programme. Goldman Sachs said they
"could even envisage such a program being expanded beyond
secured bank debt" if another one was introduced.
Goldman also said euro zone consumer price inflation at 3.0
percent -- the highest level in almost three years -- made an
immediate rate cut a more difficult sell for the ECB.
The bank raised interest rates for the second time this year
only in July. While a rapid U-turn may be painful for the ECB's
reputation, economists believe Trichet may well flag such a step
to smooth the way for his successor Draghi, who takes over the
presidency from November.
"If they don't cut though on Thursday, I think they will
have cut rates by November at the latest," said Royal Bank of
Scotland economist Nick Matthews.
"If they do cut, I don't think there is going to be a
unanimous decision. I think there are some on the Governing
Council who would prefer to focus only on the non-standard
measures for now."
(Additional reporting by Paul Carrel, Editing by Hugh Lawson)