ECB May Unveil Exit Plan, Keep Benchmark Rate at 1% (Update1)

By Frances Robinson
Dec. 3 (Bloomberg) -- The European Central Bank may today announce plans to scale back its emergency lending while keeping interest rates at a record low to foster an economic recovery.
ECB policy makers meeting in Frankfurt will leave the benchmark interest rate at 1 percent, according to all 54 economists in a Bloomberg News survey. President Jean-Claude Trichet will say the ECB’s third offer of 12-month loans to banks on Dec. 15 will be the last and may also signal a reduction in other lending operations, economists said.
The ECB, which has been flooding banks with cheap cash to fight Europe’s worst recession since World War II, said last month it will gradually withdraw the extra liquidity to prevent inflation as the economy gathers strength. At the same time, officials don’t want to give the impression they’re moving closer to rate increases, people familiar with their discussions said. Any indication that the ECB could tighten policy sooner than the Federal Reserve may fuel further gains in the euro.
"This is going to be the big one," said James Nixon, co- chief European economist at Societe Generale SA in London.
"They need to very, very carefully set out a timetable for how liquidity will be drawn down, but they don’t want to plant expectations that the exit implies they’ll raise interest rates."
The ECB announces its rate decision at 1:45 p.m. and Trichet holds a press conference 45 minutes later.

Global Stimulus

While Australia’s central bank has raised rates three times in as many months, the Fed and the Bank of England have signaled they’re in no rush to increase borrowing costs from record lows as their economies struggle to shake off the effects of the biggest global slump since the Great Depression. The Bank of Japan announced new measures this week, saying it will offer three-month loans to banks at 0.1 percent to combat deflation.
Trichet will today unveil the ECB’s new staff projections, including the first forecasts for 2011. Governing Council members such as Luxembourg’s Yves Mersch and Slovakia’s Ivan Sramko have said they expect the bank to revise up its outlook for the 16-nation economy, which emerged from recession in the third quarter.
In September, the central bank said it expected gross domestic product to grow 0.2 percent in 2010 after shrinking 4.1 this year. It projected inflation of 0.4 percent this year and
1.2 percent next year. The ECB aims to keep inflation just below
2 percent over the medium term.

‘Gradual Recovery’

The December projections will show "a gradual recovery and moderately positive inflation," said Nick Matthews, an economist at Royal Bank of Scotland Group Plc in London.
"They’ll be consistent with the view that the policy rate can remain low for a long time."
The euro has gained 20 percent against the dollar since mid-February, rising above $1.51 yesterday, which is threatening to hurt European exports. Siemens AG, which today reported its first quarterly loss in a year, last month said it expects a "slow" global recovery.
Europe’s single currency climbed 0.5 percent to $1.5117 as of 8:45 a.m. in Frankfurt.
Some policy makers have expressed concern that banks are becoming too reliant on ECB cash, and are pushing for the extraordinary lending measures to be withdrawn.
"Not all our liquidity measures will be needed to the same extent as in the past," Trichet said on Nov. 20. "Eventually, the administration of painkillers must be stopped if patients are to get on their own two feet."

Leaning

Trichet signaled on Nov. 5 that the ECB is unlikely to renew its 12-month loans to banks after December’s offering and promised to give details today. He’ll also say whether the ECB has decided to alter the interest rate on the loans. People familiar with the deliberations said last week that policy makers were leaning toward keeping the rate fixed at 1 percent.
The ECB may announce plans to reduce the frequency of its three-month and six-month loans, which it currently offers every month. The "first steps of a gradual phasing-out of non- standard measures" may include "a lower frequency for three- month and six-month refinancing operations," Belgian council member Guy Quaden said Nov. 16.
Trichet could also field questions about Dubai’s decision to seek to delay debt repayments, which roiled financial markets this week, and Greece’s ballooning budget deficit. ECB Vice President Lucas Papademos met with Greek Prime Minister George Papandreou last weekend to discuss the issue.
With markets still jittery about the sustainability of the economic recovery, the ECB will be wary of upsetting the apple cart, said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London.
"The message Trichet wants to convey is that the ECB is well placed to remove its monetary stimulus and has a strategy for doing so, but that it’s not going to do it too quickly," he said. "It’s a bit of a balancing act."