By Jack Duffy

PARIS (MNI) – The European Central Bank is likely to leave its key
interest rates unchanged on Thursday as Mario Draghi, its new president,
attempts to achieve a smooth changing of the guard without throwing any
surprises at financial markets.

Although the European economy continues to tilt ominously toward
recession, Draghi’s major concern at his first meeting as ECB president
will likely be to project an image of stability while preparing the
ground for an interest rate cut in December.

Draghi is facing not only sharply decelerating growth in the
Eurozone, with some indicators already signaling recession, but also a
consumer inflation rate that remains stubbornly above target and a debt
crisis that will almost certainly keep the ECB in the front lines of a
financial firefight for months to come.

Eurozone consumer prices rose 3% in October, a three-year high and
well above the central bank’s target of just below 2%. Although
inflation is likely to ease as the global economy slows, cutting rates
while prices are peaking is unlikely to be the kind of image Draghi
wants to project at his first Governing Council meeting as president.

At its October meeting, the ECB said growth risks were “to the
downside” and that inflation risks were “broadly balanced.” At
Thursday’s meeting, Draghi is likely say in his introductory statement
that the downside growth risks have intensified and that financial
market tensions are now weakening the Eurozone economy.

Given the current inflation rate, the ECB is unlikely to say that
price risks have also moved to the downside. However, the bank’s usual
statement that inflation “is likely to stay above 2% over the months
ahead but decline thereafter” could be sharpened to emphasize an
expected decline towards price stability.

Although former ECB president Jean-Claude Trichet never developed a
specific code language to signal a rate cut, many analysts believe that
Draghi will offer such language in his statement on Thursday.

After announcing in October a whole complement of new non-standard
liquidity measures — including two one-year LTROs, a renewal of the
covered bond purchase program, and continuation of all full allotment
operations through the middle of next year — the ECB is unlikely to
unveil any additional ones on Thursday. As for the bank’s
controversional purchases of peripheral sovereign debt, Draghi has
already dropped strong hints that they would continue.

“The Eurosystem is determined, with its non-conventional measures,
to prevent malfunctioning in the money and financial markets creating an
obstacle to monetary transmission,” the new president said in his final
speech as Bank of Italy governor last week.

Draghi is also expected to provide details of the ECB’s new E40
billion covered bond purchase program, intended to address the funding
needs of banks.

But the most important signals Draghi will give on Thursday are
about how far he is prepared to lead the ECB away from the strict
monetary path favored by German hawks like Bundesbank president Jens
Weidmann in order to battle the debt crisis.

According to Ing Group economist Carsten Brzeski, Draghi has until
now “kept a low profile and was hard to place on the ECB’s
‘hawk-o-meter’ ranking.”

Starting on Thursday, that profile could become clearer.

–Paris Bureau: +331-4271-5540; jduffy@marketnews.com

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