ECB Expected 25 bps rate rise TODAY

inspector_monkfish

01:05 07Apr11 - ECB to tread carefully with historic rate rise

* Expected 25 bps rate rise will be first since July 2008
* Trichet seen giving few clues on any further hikes
* ECB concerned by firming inflation, must watch periphery

FRANKFURT, April 7 - The European Central Bank is poised to raise interest rates from a record low 1.0 percent on Thursday and more is likely to follow but, fearful of heaping more pain on the euro zone's stragglers, it will give few clues about when the next move will come.

ECB policymakers have been out in force in recent weeks flagging a rise that will be their first since July 2008. All but four of 80 economists polled by Reuters last week expected it to raise rates by 25 basis points.

The rate decision is due at 1145 GMT. ECB President Jean-Claude Trichet will hold a news conference at 1230 GMT.

The ECB is concerned that firm oil prices -- near 2-1/2 year highs [ID:nLDE72K22T] -- could boost inflation expectations but the Frankfurt-based bank must be careful not to hurt the euro zone's struggling peripheral economies by jacking up rates fast.

Trichet, who shocked markets last month by signalling an April rate hike, will not want to heighten expectations for further rises.
Markets are already pricing in two further rises in the main refinancing rate to 1.75 percent by the year's end.

"I think it is the start of a series but I think Trichet ... will try to temper any market expectations, which are already priced in, of further hikes to come," said Lloyds interest rate strategist Eric Wand.

Bank-to-bank lending rates have already risen on rate hike expectations. The three-month Euribor rate <EURIBOR3MD=> has risen 25 basis points since the start of the year and hit its highest level since June 2009 on Wednesday.

With Greece and Ireland receiving international bailouts and Portugal under heavy pressure to seek one, the rate hike will carry risks. But the central bank believes it can tighten policy slowly enough to avoid doing serious damage there.

It feels re-establishing its inflation-fighting credibility is more important to avert an upward spiral of prices and wages. Euro zone inflation rose to 2.6 percent last month, above the ECB's medium-term target of just below 2.0 percent.

"Typically, rate expectations move very quickly once the hiking cycle starts and I think Trichet knows the recovery is still quite fragile on the euro area aggregate -- the periphery is still struggling," said Nomura economist Jens Sondergaard.

"It's a tricky act for them. They don't want to signal that this is the start of a hiking cycle. On the other hand, I don't think they can be too complacent on inflation at the moment."

TEMPERING EXPECTATIONS
The ECB never pre-commits itself to future rates rises, but financial markets will scrutinise Trichet's comments at the regular news conference he holds after the 23-strong Governing Council meets for any clues as to future policy moves.

Last month, Trichet's dusted off the phrase "strong vigilance", which in the past signalled a rate rise was only a month away.

If, at Thursday's news conference, he omits a reference to rates being "appropriate" and says the ECB is monitoring inflation "very closely", markets will expect another rise in the coming months. But economists expect him to be coy.

The ECB may soften the impact of its key refi rate hike by leaving a subsidiary rate unchanged -- a move that will be closely watched to gauge just how nervous the bank is about inflation and how much pain it thinks the periphery can bear.

The ECB's overnight deposit rate, which acts as a floor for short-term market rates, could be exempted from the hike and left at 0.25 percent. This would make the refi rate rise largely symbolic; actual money market rates which guide the cost of bank borrowing might barely move.

An important issue that Trichet may have to dodge is when the ECB will phase out its offers of unlimited loans. These were introduced as an emergency step but have now become a liability, injecting so much money into banks that the ECB cannot effectively control market rates.

Last month, euro zone official sources told Reuters the ECB was close to creating a new liquidity facility that would support weak banks in Ireland and elsewhere, helping it eventually to phase out unlimited loans.

However, disagreements within the Governing Council over how much aid the central bank should provide to countries have caused that plan to be suspended. In the absence of an alternative to unlimited loans, Trichet will probably be unable to say anything explicit about ending them.

whatyadoinsucka

i read last week they were planning a .25% rate rise, many parts of the european economy is far stronger than ours as they actually make products and not rely on china to make cheap exports to us..

can anyone confirm the discussion about offering discounted base rates to struggling economies, i heard ireland would get a discount rate

inspector_monkfish

there are also some extremely weak parts of the european economy....

inspector_monkfish

01:10 07Apr11 ANALYSIS-Portugal aid could mark end of spreading crisis

* Markets already thought bailout almost inevitable
* EU can easily cope with size of bailout
* Spain now has good chance of avoiding contagion
* Portugal rescue may be simpler than Greece, Ireland
* But restructuring, banking risks will not disappear

BERLIN, April 7 - Portugal's decision to seek international aid removes a cloud of uncertainty over the euro zone and has a good chance of ending the spread of debt market crises to fresh countries in the region.

Investors had believed for months that a bailout for Portugal was almost inevitable, so the announcement by caretaker Prime Minister Jose Socrates on Wednesday is unlikely to hurt financial markets. The euro <EUR=> barely moved in the initial hours after the announcement.

The expected size of the bailout, 60-80 billion euros according to a senior euro zone source, will not strain the euro zone's 440 billion euro bailout fund, especially since the International Monetary Fund is likely to be involved. Based on past bailouts, it would contribute about a third of the amount.

Many investors will see the request for aid as positive since it promises to avoid a worst-case scenario in which Portugal would have limped along under a minority government until general elections scheduled for June 5, refusing to seek help and digging an ever-bigger economic hole for itself.

This would have continued to push up Portuguese bond yields and threatened a collapse of its finances that might have prompted markets to start attacking Spain, widely seen as the next potential domino in the euro zone.

Other governments in the zone have therefore been pressing Portugal to request a bailout, and Lisbon's willingness to comply -- despite its bad memories of IMF-ordered austerity in the 1980s -- suggests the region remains able to summon enough political unity to address its debt problems.

"This is good news. We've been saying for a while that Portugal's finances were not sustainable at these rates," Erik Nielsen, chief European economist at Goldman Sachs, told Reuters. "We think the contagion stops here."


SPAIN
As recently as the turn of the year, it seemed likely that markets would target Spain if Portugal followed Greece and Ireland in seeking a bailout.

But the government of Spanish Prime Minister Jose Luis Rodriguez Zapatero has unveiled a series of reforms of the labour market, pensions and banking sector in past months. A stabilisation of Spanish bond spreads shows many investors now believe it can avoid the fate of its smaller neighbour.

Portugal will have to agree to tough austerity targets to obtain a bailout, and how quickly a deal can be negotiated is unclear. Socrates resigned abruptly last month after his latest package of austerity measures was voted down in parliament, and his caretaker government has said it lacks the authority to negotiate an economic adjustment programme.

European Union officials may also be loath to pursue an agreement before a new government emerges in the aftermath of the June 5 elections. In the case of Ireland, the EU sealed a bailout deal with a lame duck administration only to face demands for changes from a new government in Dublin.

However, now that it is requesting aid, Portugal has much better prospects of obtaining some kind of bridging loan if that is necessary to tide it over until a full bailout deal.

And unlike Ireland, where crumbling banks have been a black hole for state funds, and Greece, which is struggling against ingrained tax evasion and corruption, Portugal may be a relatively straightforward case for the EU and the IMF.
The country already has an austerity plan in place which has received the blessing of EU governments and IMF officials.

Also, Europe has learned lessons from the two previous bailouts. There is now a broad consensus in policymaking circles that the rescue terms for Greece and Ireland were too onerous, straining their economies and finances, so Portugal can hope to get somewhat softer terms in some areas.

"Investors no longer seem to be worried about a full-blown euro zone crisis and the potential demise of the common currency because they assume mechanisms are now in place to prevent the crisis from escalating out of control," said Jane Caron, chief economic strategist at U.S. firm Dwight Asset Management.

DEBT, BANK RISKS
Still, while a Portuguese bailout may end the geographical spread of sovereign debt problems in the euro zone, it will not remove two big risks faced by the weakest countries: the possibility of sovereign debt restructurings, and the threat of deeper problems in the banking sector.

Some senior government officials in the zone are now acknowledging for the first time in private that some form of debt restructuring for Greece may be inevitable, even though officials publicly deny it will happen.

A number of economists believes the same fate may await Ireland and Portugal, although probably at a later date.

Those fears are likely to keep market interest rates in all three countries very high for years, even if the countries do carry out the economic and fiscal reforms demanded by the EU and the IMF.

Joao Leite, head of investment at Banco Carregosa in Lisbon, said international aid would solve Portugal's financing problems but that the country still faced a daunting task addressing its large deficits, competitiveness problems and weak growth.

"Unfortunately, the solutions to these problems will only have an impact over the longer term. Until then the Portuguese have a hard road ahead."

inspector_monkfish

08:22 07Apr11 DJN-DJ MARKET TALK: EUR75B Could Fund Portugal For 3 Years -ING


0722 GMT - A EUR75 billion rescue package for Portugal would fund
the exchequer and redemptions for up to three years, says Padhraic Garvey at ING.
The average rate on Irish loans was 5.8% at the time of its bailout, he notes.
The recent 100 bps cut in the rates charged to Greece prompts ING to assume
Portugal will pay less than Ireland, which "could have gotten something similar
if they had played ball on their corporate tax rate. Whatever Portugal gets would
likely also be applied to Ireland as this negotiation completes itself."