ECB will seek to reassure markets on rates

The European Central Bank will seek to reassure markets that it has no plans to start raising interest rates when its policy-setting governing council meets later Thursday, analysts said. "The latest signs of economic stabilisation should comfort the ECB in its wait-and-see stance. We don't expect any new policy action at this week's meeting," said ING DiBa economist Carsten Brzeski. At its June meeting, the ECB held its key rate unchanged at a current record low of 0.5 percent and its president Mario Draghi insisted at the time that the bank stood "ready to act to given the eurozone economy a much-needed shot in the arm. Marie Diron at Ernst & Young Eurozone Forecast also predicted no policy moves this time round. "We do not expect any change in interest rates. However, we hope that the ECB will take into account the recent volatility in financial markets developments and in particular the rise in government bond yields in eurozone peripheral countries," she said.Financial markets have been spooked by the announcement last month that the US Federal Reserve is preparing to phase out its bond-buying or so-called "quantitative easing" programme, bringing the prolonged period of loose monetary policy to an end. In response, sovereigns yields have risen across the euro area and financial conditions have generally tightened, albeit not dramatically. It was enough, however, to draw top ECB officials such as president Draghi and executive board member Benoit Coeure into publicly proclaiming that the period of low interest rates is not going to come to an end on this side of the Atlantic. Central banks in the industrialised world have been keeping interest rates at all-time lows, thereby lending money cheaply, in a bid to stimulate the ailing economy. "To soothe market fears, the ECB has embarked on a coordinated communications offensive. ECB board members and even hawkish national central bankers have used speeches to warn against a premature policy exit," said Berenberg Bank economist Christian Schulz. But analysts are divided whether eurozone interest rates will continue to go lower in the coming months. Natixis economist Cedric Thellier said he was pencilling in no change in rates, at least for this month. "Draghi should emphasise the quite well oriented leading indicators, suggesting a broad stabilisation of the economy over the next quarters," the analyst said. "But no doubt he will keep a clear-cut communication, repeating the monetary policy stance will remain accommodative for as long as necessary and the governors stand ready to act if needed." Brzeski at ING DiBa said Draghi "will not use traditional policy tools but rather central bankers' other powerful tool: words. In our view, Draghi will try to send verbal messages to market participants." Diron at Ernst & Young said: "We believe the ECB could fine tune its communication and give more forward guidance about the future stance of monetary policy. "At a time when investors are uncertain about the timing of changes in monetary policy in the US, some reassurance by the ECB that eurozone monetary policy will remain very accommodative for a long time would be helpful," Diron concluded.