The European Central Bank is likely to leave the
euro's low interest rates unchanged when it meets Thursday, analysts
predicted, despite recent turmoil around Cyprus' bailout and a
further drop in inflation.
The ECB's rate-setting council is expected to announce that it is leaving interest rates on hold at an historic low of 0.75 per cent, while considering other ways of easing access to credit for small and medium-sized enterprises (SMEs) across the currency bloc.
"The latest drop in confidence indicators, the aftermath of the Cyprus crisis and lower inflationary risks could provide the ECB with an excellent justification to cut rates this week," wrote Carsten Brzeski of ING bank.
"However, in our view, the ECB will again resist the temptation and keep rates on hold on Thursday," he added.
"The main reason for the ECB to hold rates unchanged is that it continues to expect the economy to improve in the medium term," Danske Bank wrote to clients.
At the same time, ECB President Mario Draghi would likely reiterate the bank's commitment to an "accommodative monetary policy" to protect the euro area, analysts agreed.
The fractured nature of the eurozone bloc, which shares a currency but is governed by 17 individual monetary policies, makes it harder for interest changes to directly impact the economy.
"The monetary transition mechanism remains broken so that the real economy would not benefit fully from a rate cut," Danske Bank wrote.
"Bank lending rates still differ significantly across the eurozone," Brzeski said. "Lending to small and medium-sized enterprises has become the most pressing issue for the ECB."
"We would expect the ECB's next policy move to aim at easing credit conditions for SMEs, which are particularly tight in the periphery, even if it may not be announced in next week meeting," wrote analysts at Barclays bank.
But such steps are considered politically difficult, as they would likely require more direct relief to banks or the purchase of bundled SME loans - steps that could be seen as "recapitalization of peripheral banks through the back door," according to Brzeski.
"The ECB is caught on a fragile tightrope walk: on the one hand, the ECB does not believe in the curative impact of a rate cut but, on the other hand, it has not yet come up with a politically-acceptable solution for the SME funding problem," the ING analyst concluded.
Thursday's rate-setting meeting comes as a series of recent economic indicators demonstrated the depth of the bloc's economic crisis.
On Wednesday, annual eurozone inflation was estimated at 1.7 per cent in March, down one point on February's figure which had fallen below the ECB's 2-per-cent target for the first time since November 2010.
Eurozone unemployment hit a record high of 12 per cent in February, or more than 19 million people, according to figures released this week. Meanwhile, economic sentiment dropped off last month, ending a four-month upward trend.
"Wage pressures on inflation will remain very subdued in most of the eurozone, allowing the ECB to pursue further steps to ease monetary policy," wrote Martin van Vliet of ING bank.
"However, we doubt whether all ECB governors agree that the time is ripe to take fresh monetary action," he added.
Germany's Commerzbank also dismissed fears of the "ghost of deflation," doubting that inflation rates would fall permanently below 1.5 per-cent.
Draghi was also expected to be pressed on Cyprus at Thursday's press conference, days after Nicosia's international lenders agreed the terms of a bailout that imposes hefty losses on large depositors.
Draghi was likely to play down speculation that Nicosia's bailout could serve as a template for other countries, Barclays wrote, after comments to that effect were made last week by Jeroen Dijsselbloem, the head of the Eurogroup of eurozone finance ministers.
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