ECB rate to hit new record low

Since the ECB's last meeting, data have confirmed that the euro-zone economy probably kept contracting at the start of 2009 while inflation is set to fall sharply, backing the case for more central bank action.

Economists see only a slim chance the ECB will follow other major central banks and announce a debt-buying program on April 2 -- the same day that Group of 20 leaders meet in London to discuss a joint response to the financial crisis.

Although comments from policymakers like Vice-President Lucas Papademos suggest the ECB is warming to the idea of bond purchases, for now it is tipped to extend the maximum loan term for its liquidity operations, potentially lending banks funds for 12 months or more compared to the current six months.

In a further twist, analysts also expect the ECB to cut its lowest policy rate, the overnight deposit rate, by less than the main refi rate to avoid driving money market rates down too low.

Economists polled by Reuters expect the ECB to cut the overnight rate, which is acting as a floor for markets under the ECB's policy of injecting unlimited amounts of liquidity, by only 25 basis points to 0.25 percent, stopping short of zero.

Eight out of 10 economists polled expected the main refi rate to be cut by 50 basis points to 1 percent, with only a small number predicting a smaller, 25-point move or a freeze at the current 1.5 percent.

"There is a risk that they could split the move to 1 percent, they could do 25 basis points this month and 25 basis points in May," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.

"But I think the risks are skewed to 50 basis points at the April meeting."

Cutting the main refi rate to 1 percent and the deposit rate to just 0.25 percent would narrow the ECB's rate corridor, an approach it tried late last year and then abandoned after banks took the opportunity to park excess funds at the central bank rather than lend them on.