ECB holds rates

[HenryTo]

No surprise here - consensus is that the ECB won't raise rates until March. Following is the schedule of the Governing Council of the ECB: http://www.ecb.int/events/calendar/mgcgc/html/index.en.html
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ECB holds rates, markets await sign on March hike
Thursday 2 February 2006, 7:51am EST

By David Milliken

FRANKFURT, Feb 2 (Reuters) - The European Central Bank held its main interest rate at 2.25 percent on Thursday, although President Jean-Claude Trichet is likely to prepare financial markets later for an increase in March.

Trichet will explain the Governing Council's views at a news conference at 1330 GMT, and analysts are all ears for whether he will revert to his watch words over inflationary risks.

"If you hear Trichet saying that he and other Council members are vigilant -- it doesn't matter about what -- read this as a signal that he intends to hike rates in four weeks," said Kornelius Purps, fixed-income analyst at HVB in Munich.

Since the Council's last policy meeting three weeks ago, data have shown euro zone inflation, at 2.2 percent, remains above the ECB's ceiling and economic growth prospects are mixed.

Markets are anticipating a slightly more hawkish tone at the news conference after Spain's central bank noted on Wednesday that ECB rates were accommodative, and Bundesbank President Axel Weber said last Friday that the ECB was ready to act quickly to raise rates if needed.

However, some data have sent mixed signals, which could make reaching consensus on a March rise more difficult. Job cuts pressured the PMI manufacturing index in January slightly, retail spending in France fell and a rising euro raises questions over how much the region can rely on export strength.

So far the ECB has said it plans no series of rate increases. ECB staff will update their economic projections in March, giving Council members a better sense of the outlook.

Financial markets firmed a little after the ECB held rates steady. The euro ticked upward to $1.2068 against the dollar from $1.2066 <EUR=> before the announcement, and the June Euribor futures contract rose to 97.105 from 97.100.

EYES ON MARCH

Almost all the 60 analysts polled by Reuters last week said a rate rise was more likely in March than February, as the consensus-based ECB needed more time to persuade waverers and see harder evidence of a strong recovery.

"The data flow has been pretty mixed over the past three weeks, with survey data fairly robust, but most of the hard data

-- German retail sales, employment, consumption -- turning out on the softer side, which casts some doubt on how strong the recovery is," said Michael Hume, an economist with Lehman Brothers.

The European Commission reported economic sentiment hit its highest level since mid-2001 in January and industrial new orders rose more than expected, but German unemployment rose again above the sensitive 5 million mark, and French and Italian consumption indicators fell.

Equity markets have been buoyant too, with European shares touching a 4-1/2 year high on strong profits and expectations of more big takeover bids like Mittal Steel's for Luxembourg-based steelmaker Arcelor.

Despite the ECB's quarter point rate increase in December, the first rise for five years, ECB rates are low in historical terms. ECB policymakers are keeping a close watch on inflation as interest rates are barely positive in real terms, while economic recovery appears to be gaining pace.

However, Hume highlighted a stronger euro, reports of divisions on the Governing Council and no strong hints of an immediate rate rise as further reasons not to expect a change this month. "All those things together point to rates being left on hold," he said.

Thursday's ECB meeting, the second since it raised rates in December, included for the first time the new Italian central bank chief Mario Draghi. He replaces Antonio Fazio, who resigned in December after being accused of showing favouritism when supervising a bank takeover.