ECB rates firmly on hold

FRANKFURT- The European Central Bank kept benchmark interest rates unchanged at a record low of 1.0 percent on Thursday with the ECB expected to remain in a holding pattern given uneven growth and low inflation.

All 80 economists in a recent Reuters poll had expected rates to remain on hold for the eighth month in a row and all but a handful see the central bank keeping them there well into the second half of the year as it waits for the recovery to firm.

Attention now turns to ECB President Jean-Claude Trichet's news conference at 1330 GMT (1:30 p.m. British time), when he is likely to confirm rates are appropriate and be quizzed about the ECB's view of Greece's fiscal troubles. Markets were little changed after the decision.

ECB watchers expect Trichet to give little new information on the ECB's plan to wean the banking sector off its support measures, although it may keep the process inching forward with a decision on whether or not to keep up dollar and Swiss franc lending operations.

The press conference today will probably be a holding operation, BNP Paribas economist Ken Wattret said.

We won't be looking to see any major changes in assessment ... their view is likely to be fairly similar to December.

Last month, the ECB started reeling in its crisis support measures -- mainly unlimited, ultra-cheap loans to banks, which have pushed bank-to-bank lending costs to record lows.

But Greece's deteriorating fiscal situation is one of many bumps on the recovery horizon, with recent mixed data also highlighting the need for policymakers to be careful in removing the financial crutches.

Greece announced key targets of a three-year plan to shore up its public finances on Thursday, following visits by ECB and European Commission officials last week and ahead of the release of an EU review of Greece's stability program.
Investors remain unconvinced the country can get its budget into shape, with the cost of insuring Greece's sovereign debt against default rising to a record high.

Deutsche Bank economist Mark Wall said Trichet would try to say as little as possible but anything less than another vote of confidence in Greece's ability to handle matters could set off alarm bells.

CAUTIOUS OPTIMISM

On the economic outlook, Trichet is expected to stick to a cautiously optimistic view.

Data showed the mood surrounding the economy improved more than expected in December, but unemployment jumped above 10 percent, retail sales disappointed and money supply shrank for the first time on record.

The Governing Council should continue to signal that policy will remain accommodative for a considerable period, said Fortis Bank economist Nick Kounis. We think it will take some time before it begins to tighten policy.

Goldman Sachs economist Dirk Schumacher said despite the data hiccups, there was no reason for a change of rhetoric or tone from the ECB.

Deutsche Bank's Wall also sees Trichet sticking to the view that both growth and price inflation prospects remain broadly balanced, and that interest rates are appropriate.

The ECB is expected to decide whether or not to keep lending in U.S. dollars and Swiss francs when the current arrangements expire in the next few weeks and money market analysts point out that demand in foreign currency operations has shrivelled in recent months.
The final focus for markets at the 1330 GMT (1:30 p.m. British time) news conference will be to see if Trichet responds to renewed French concerns that the euro's strength is damaging the region's recovery.

Given the exchange rate has depreciated over the last few weeks, on that side of thing they (ECB) should be more relaxed, said Goldman Sachs' Schumacher.

(Reporting by Marc Jones; editing by Mike Peacock)