Some clouds clear ahead of ECB rate decision

The European Central Bank governing council might breathe a sigh of relief this week as no potential disaster hangs over its monthly meeting for the first time in a while.

The main ECB interest rate is sure to remain at a record low of 1.0 percent for the 16th month running and governors can take a summer break in the wake of some positive economic indicators and amid relative calm on financial markets.

Recent ECB meetings have been held as the Greek debt crisis festered, record one-year bank loans were coming due or markets braced for the results of stress tests on European financial institutions.

Though all is not clear on the economic front, the situation looks brighter, and the ECB has curtailed controversial public debt purchases that had raised questions about its independence.

"However, ECB president (Jean-Claude) Trichet will not announce the formal end of the bond purchase programme" at a press conference following the rate decision on Thursday, Commerzbank economist Michael Schubert predicted.

"If the ECB keeps the option of further buying open, this should calm the markets because the central bank could intervene to give support if push came to shove."

Financial conduits the operation was designed to unblock are running more smoothly, as are parts the wider eurozone economy.

Last week, the European Commission's Economic Sentiment Indicator hit its highest level in more than two years, led by eurozone locomotive Germany, well-padded order books and a rise in consumer confidence.

The euro has rebounded on foreign exchange markets, trading on Friday around 1.30 dollars, which cuts two ways in fact because eurozone exporters were key beneficiaries of its drop from near 1.45 early this year to below 1.20 in June.

That fall fueled inflation however, believed to have shot up to 1.7 percent in July, European Union figures showed Friday, the highest level since November 2008.

Unemployment across the 16 countries that share the euro remained stuck meanwhile at a record 10 percent in June for the fourth consecutive month.

Economists are comparing growth prospects for Europe and the United States to determine whether the ECB or US Federal Reserve is likely to begin raising interest rates first.

Commerzbank economist Bernd Weidensteiner expected the US economy "to grow twice as quickly as the euro zone in both 2010 and 2011."

"Against this background, the Fed will most likely hike rates earlier than the ECB," he forecast.

The US federal funds rate target now stands between zero and 0.25 percent, while in Britain the Bank of England is also tipped to maintain its record low rate of 0.50 percent this week.

A key criteria for eurozone growth prospects is credit availability, for banks to begin with and for their clients later on.

"Some banks, most notably in the peripheral economies, are still heavily reliant on central bank funding," Capital Economics senior economist Jennifer McKeown said in reference to countries like Greece, Portugal and Spain.

"Eurozone commercial bank lending to the private sector remains extremely weak, rising by just 0.3 percent in the year to June," she added.

The ECB's latest bank lending survey showed credit standards for businesses were tightened in the second quarter, and banks forecast further tightening in the third.

A question mark hangs therefore over growth prospects for the rest of 2010, in Europe and in the United States where economic growth slowed sharply to 2.4 percent in the second quarter.

The ECB will keep providing unlimited supplies of cash to banks through the end of the year but is keen to unwind such measures as soon as possible.

"The ECB expects (as we do) a moderate and mixed economic recovery overall," Commerzbank's Schubert said.