Business and Finance

The European Central Bank is expected to keep interest rates at a record-low 1.0 percent on Thursday and its head Jean-Claude Trichet will probably caution against high hopes of a speedy economic recovery.

The 16-country bloc is likely to have exited the worst recession since World War Two in the third quarter of the year but all 82 economists in a Reuters poll said they see no move in interest rates for the fifth month running, with most expecting them to stay unchanged until late next year.

The meeting, now underway in Venice, Italy, is the second of the two rate meetings held annually outside the ECB’s Frankfurt base, and marks the first anniversary of coordinated rate cuts by major central banks in the aftermath of the Lehman Brothers collapse.

The Reserve Bank of Australia on Tuesday became the first Group of 20 central bank to raise rates after the global recession, but the ECB is not expected to follow suit for some time.

While most analysts expect the next rate move to be a hike, they forecast that it will not happen before the third quarter of next year. But tighter liquidity conditions may push up market rates before that, futures pricing shows.

The Bank of England will also publish its rate decision on Thursday, and it is expected to keep its rates on hold at 0.5 percent.

At his news conference, ECB’s Trichet is seen confirming that current policy settings are appropriate and markets will listen any clues on the timing and order of the ECB’s exit strategy.

“Current rates are appropriate, that is a key sentence that will probably stay until well into next year,” Bank of America economist Holger Schmieding said online pay day loans.

But the ECB is unlikely to detail its exit strategy, just to repeat that it can exit when needed, he added.

Trichet’s comments on how governments should wind back their extra spending and how the ECB will take fiscal exit into account in its monetary policy decisions will also be key.

“They will definitely not do any explicit coordination (between fiscal and monetary exit strategies),” Schmieding said, but added: “There might be actually be a case that if fiscal policy is tightened in 2011, the ECB may take that into account and thus have an indirect impact on its rate policy.”

DOLLAR WEAKNESS

Trichet’s comments on economic recovery will also face close scrutiny. The euro-zone economy shrank by a revised 0.2 percent in the second quarter of the year, and analysts expect it to have grown 0.3 percent in the July-September quarter.

But even though the ECB meets in what many say is the most romantic city in the world, the Trichet is not expected to shower the markets with love, but caution on too much optimism.

ECB policymakers have said the road ahead would be bumpy, and Trichet is unlikely to change his tune just a month after the latest set of ECB staff economic projections. 

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