European Central Bank assesses auction impact

The European Central Bank is expected to keep its key interest rate unchanged Thursday as it awaits to see whether last week's massive liquidity injection will get banks to lend more money to businesses and consumers and support the struggling economy. Despite some worries that a corrosive spiral of falling prices may become entrenched in the 16 countries that use the euro currency, most analysts think the central bank's president, Jean-Claude Trichet will say that the current interest rate is "appropriate" - indicating that it will not begin raising rates from their record low of 1 percent any time soon. Prices in the euro are now falling. Higher rates are used to combat inflation, but the opposite problem - sluggish growth, falling prices and weak demand - remains at the fore. Many members of the bank's rate-setting governing council have indicated that they would not favor reducing the benchmark rate. Last Wednesday's euro442 billion ($621 billion), 12-month money auction was widely seen as successful in that it managed to reduce interbank interest rates. Whether the falls get banks lending to each other - the main point behind the liquidity injection - will take time to assess. Loans to the private sector remained low before the auction, rising by only 0.2 percent in May from the previous month. For now, the ECB will be looking for evidence that its liquidity injection is bearing dividends and is therefore not expected to announce any further "unconventional" measures aside from its recently announced limited program to buy euro60 billion worth of euro-denominated covered bonds - a low-risk type of asset-backed securities. In contrast to the measures announced by the ECB, the Fed and the Bank of England have cut their interest rates to below 0.25 percent and 0.5 percent respectively and unveiled much larger programs to boost the money supply to get banks lending again. Many analysts think the European Central Bank's relative caution will likely mean that the euro zone recovers later and more slowly than the United States and possibly Britain. The Bank itself does not expect recovery to kick in fully until the middle of next year.