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PREVIEW-ECB to announce further exit steps for Q2, hold rates
March 1, 2010 / 12:52 PM / 8 years ago

PREVIEW-ECB to announce further exit steps for Q2, hold rates

- What: ECB to decide on interest rates, exit steps

- When: Thursday March 4. Rate decision 1245 GMT, news conference 1330 GMT

- Reuters forecast: All 87 economists polled expect rates on hold at 1 pct, and 24 of 31 money market traders said the ECB should extend full allotment for loans. [ECB/INT]

FRANKFURT, March 1 (Reuters) - The European Central Bank is set on Thursday to unveil the next steps in its gradual withdrawal of emergency lending measures put in place to support banking at the height of the financial crisis.

Economists expect the central bank’s regular meeting will keep interest rates unchanged and the focus to be squarely on liquidity conditions heading into the third quarter, when banks must repay a massive 442 billion euros in 12-month funds.

Below are some possible outcomes of the meeting.

KEEP INTEREST RATES UNCHANGED

Economists were unanimous in their expections of no change to rates this month, and most do not expect any rise in benchmark credit costs until the fourth quarter. At his news conference, ECB President Jean-Claude Trichet is likely to say rates are appropriate and the inflation outlook remains subdued.

PROBABILITY: High

MARKET IMPACT: Little

EXTEND FULL ALLOTMENT FOR ALL OPERATIONS INTO Q3

The ECB has promised to keep its policy of unlimited funds at fixed rates until April 13 for weekly lending oprations, and until the end of March for longer-term operations. Given expectations for weak growth in the first quarter and worries about Greek debt, some policymakers are pushing for current easy liquidity conditions to be extended. But others would prefer to keep up the momentum around the exit.

PROBABILITY: Moderate.

MARKET IMPACT: Likely to push up the euro initially. Would help keep LIBOR market interest rates low, and the front end of the bond yield curve would be practically unchanged.

PUT LIMITS ON ACCESS TO THREE-MONTH LIQUIDITY

Returning three-month liquidity operations to an auction process while keeping up full allotment over shorter periods would encourage a shortening of the maturities of outstanding loans, a further step towards normal conditions, while making sure banks can still meet funding needs. Still, any suggestion the ECB is withdrawing support more quickly than markets can cope with would set off alarm bells.

PROBABILITY: Moderate.

MARKET IMPACT: Likely to flatten the bond curve by five basis points in the two- to five-year curve, as 2-year yields would rise. Likely to be neutral for the euro as long as unlimited funds are available over shorter periods.

MAKE ONE-MONTH OPERATIONS PERMANENT

Several officials have said the ECB is likely to make one-month lending operations a regular part of its operations. Keeping these up at full allotment would offset any move to limit access to three-month funds.

PROBABILITY: High

MARKET IMPACT: Little.

INDEX RATE AT 6-MONTH OPERATION TO REFI RATE

The ECB introduced a tracker rate for its December 12-month loan and officials have said they may follow a similar approach for the last six-month operation, at which traders expect demand of about 35 billion euros.

PROBABILITY: High

MARKET IMPACT: Little. Markets have coped with indexation at the 12-month operation and expect a similar approach.

NEW STAFF FORECASTS BROADLY IN LINE WITH DECEMBER

ECB staff in December forecast growth of about 0.8 percent this year and 1.2 percent in 2011, while inflation was seen at about 1.3 percent this year and 1.4 percent in 2011. European Commission forecasts released last week were broadly similar.

PROBABILITY: High

MARKET IMPACT: An upward revision to growth and inflation would likely increase bets on rate hikes and push the front end up by about 10 basis points. Lower numbers could push short-term yields down by about 5 basis points or more.

URGE GREECE TO KEEP WORKING TOWARDS BUDGET TARGETS

The ECB has so far said it approves of Greece’s goal to cut its budget deficit to below 3 percent by 2012 and expects it to be met, while stressing that no special help will be forthcoming from the ECB.

PROBABILITY: High

MARKET IMPACT: Support from the ECB after last week's visit by officials would likely support the euro EUR=, which has been under pressure due to fears of Greek default.

SAY GREECE‘S BUDGET TARGETS DIFFICULT TO MEET

PROBABILITY: Low

MARKET IMPACT: Such a blunt expression of no-confidence in Greece’s budget reform plans would likely send the euro dropping towards $1.30. The German bond yield curve could steepen by about 10 basis points and the spread between Greek and benchmark German yields would likely increase. (Reporting by Krista Hughes and Sakari Suoninen; editing by Patrick Graham)

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