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ECB to leave rates, reassure no exit from stimulus

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DAVID McHUGH | July 3, 2013 07:33 AM EST | AP

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FRANKFURT, Germany — European Central Bank President Mario Draghi is likely to stress Thursday that the bank is still a long way from following the U.S. Federal Reserve and contemplating phasing out stimulus.

Economists expect the ECB to leave its benchmark interest rate for the 17 European Union countries that use the euro unchanged at a record low of 0.5 percent when its 23-member council meets at its headquarters in Frankfurt, Germany.

Instead of cutting rates, the ECB is expected to try and sooth Europe's markets ruffled by the Fed's message that it could start scaling back its bond purchases this year – and end them in 2014 – if the stronger U.S. economy keeps growing.

The Fed's bond-buying program – known as quantitative easing – and its low interest rates had been sending money flowing into stocks and bonds for months.

So when the Fed Chairman Ben Bernanke signaled its potential reversal, prices fell across many markets. In particular, indebted eurozone countries Spain and Italy briefly faced higher borrowing costs rise as the prices of their bonds dipped.

Draghi and other members of the bank's leadership have been at pains to point out that they are on a different track from the Fed and any exit is "distant".

"Unlike the Fed, however, it is clearly too early for the ECB to signal a shift in its monetary policy stance," Berenberg Bank economist Christian Schulz wrote in a research note. "ECB President Draghi will use the press conference to reassure banks and markets that there is a (unanimous?) ECB consensus" that rates will stay low and credit to banks easily available.

Analysts and investors will also be scrutinizing Draghi's words at his post-meeting news conference for any sign of new stimulus. The eurozone could use a boost; its economy shrank 0.2 percent in the first quarter, the sixth straight decline in a row. Unemployment is at 12.2 percent.

So far, the ECB has cut the rate it charges private-sector banks to a record low and given unlimited cheap loans to banks for three years. It also offered to intervene in bond markets and buy the debt of financially troubled countries that promise to reform their finances. The mere offer, so far not carried out, has supported bond prices and lowered interest yields. This has taken the pressure off the government finances of Spain and Italy and eased the atmosphere of crisis that held sway over Europe last year.

But the low interest rates and cheap loans have not pulled the eurozone out of its recession. Low rates are still not being uniformly passed onto businesses by banks because some have strained finances.

Draghi has said the ECB is looking "360 degrees" at other ways to stimulate the region. Here are things the bank could do in coming months:

_ Another cut in the benchmark rate, to 0.25 percent, to lower borrowing costs for businesses and consumers. It could also cut the cost of ECB loans to banks and help their finances a little bit.

_ Give explicit reassurance that low rates will stay until growth or unemployment reach numerical targets. This kind of confidence-building, called "forward guidance," has been used by the Fed. So far the ECB has simply said rates are low "for as long as necessary."

_ Another offer of cheap, long-term loans to banks. That would make sure they have the money to lend when the economy starts to pick up and businesses start asking for it. Some think another round of loans could be for as long as five years.

_ Work with the European Investment Bank to encourage banks to bundle more loans to small businesses and sell them off as bonds. That would encourage lending. The ECB can't do this alone, however, and it could take months to set up.