ECB to face stress test, liquidity grilling
The European Central Bank will face pressure on Thursday to say if it is worried by rising bank-to-bank lending rates, whether it will extend liquidity support and how it sees Europe's bank stress tests panning out.
With the ECB pausing for breath after taking extraordinary action to respond to the euro zone debt crisis, all 76 economists recently polled by Reuters expected the ECB to keep interest rates at their record low of 1.0 percent.
The ECB's policymaking Governing Council began meeting shortly after 0700 GMT (3 a.m. EDT).
Soon afterwards, official data showed euro-priced interbank lending rates hit their highest levels in 10 months on Thursday.
I think they would be worried if this continued over the summer, said Lloyds TSB economist Kenneth Broux.
The creep up in the bank-to-bank lending rates came amid signs of slowing euro zone growth and market concerns that the Europe-wide bank stress tests will not be tough enough.
The three-month Euribor rate -- traditionally the main gauge of interbank euro lending -- climbed to 0.810 percent from 0.802 percent the previous day, the highest level since early September.
While the ECB might exude swan-like calm on the surface, underneath it's thrashing around to keep its head above water, said Steve Barrow, currency strategist at Standard Bank.
Throughout the crisis, the central bank has sought to address worries by offering banks extra cash. Market players will look for guidance on whether the ECB plans to extend its liquidity support beyond the current end-date of mid-October.
They will also want the central bank to spell out more details of the government bond purchase programme it began in May to contain Greece's and the euro zone's debt crisis.
The high-profile stress tests being carried out on a sizeable chunk of Europe's banks will be a further focus for the ECB's news conference. The health checks go to the root of the woes dogging the euro zone's financial sector.
LIQUIDITY
ECB President Jean-Claude Trichet is, like last month, likely to give little away on the central bank's plans for liquidity support and bond buying.
I think there will just be a sense of relief that the euro has stopped collapsing and the banking sector hasn't fallen over, said Societe Generale economist James Nixon.
I think rate hikes are so are off the horizon it's not really worth talking about, he said.
Prior to last month's meeting the euro had fallen 17 percent in six months on a trade-weighted basis -- its most dramatic drop on record -- on fears the euro zone debt crisis could force troubled members out of the single currency. The euro has gained back some of the ground since then.
The ECB is likely to take comfort from banks' apparent trouble-free repayment of 442 billion euros in emergency loans last week -- an obligation they met with only modest demand for funds from the central bank aimed at smoothing the process.
We think the ECB will be feeling somewhat relieved that the 12-month tender rolled so successfully last week, said Nixon. In that sense, I think that the ECB have emerged with their exit strategy intact.
Nixon expected the ECB to wait a while before announcing whether it will keep its ultra-easy lending in place beyond the current mid-October end-date.
There is no reason for them to offer any new insights, or new initiatives on that line.
Annual inflation in the euro zone was lower than expected at 1.4 percent in June, data released last week showed, pointing to subdued prices pressures despite an improving economy. Economic growth was 0.2 percent quarter-on-quarter.
RBS economist Nick Matthews expected the ECB to stick to its view in June that price developments should remain moderate over the policy-relevant medium-term horizon. I don't see that changing, Matthews said.
STRESSFUL TIMES
Markets will be looking for anything the ECB can say on the progress of the bank stress tests, which European Union bank regulators are conducting in the hope of restoring confidence in markets worried about ballooning public debt.
Markets are so far unconvinced the tests, whose results are due to be published on July 23, will be tough enough and Trichet will be pressed to offer some insight into their likely outcome.
Maybe Trichet will try to soothe market fears and suggest that taken together the market system is robust and well placed to pass the stress tests, said Matthews at RBS.
But I think the markets will be concerned about how many of the smaller banks may not be in a good position when we know the results of the stress tests, he said.
Europe has listed 91 banks taking part in the tests -- including many regional banks where markets suspect most of the sore spots are -- as it seeks to restore confidence in the sector.
Trichet said on Sunday the tests would be an important element in restoring market confidence. They could also trigger a return in risk appetite if lenders perform well.
(Editing by Mike Peacock)
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