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By Sakari Suoninen
February 22, 2012 11:43 AM EST
Two rate cuts, an expected 1 trillion euro stimulus and tentative signs of the euro zone economy stabilising have diminished the chances that the European Central Bank will cut interest rates to a new low.
The dramatic start of ECB President Mario Draghi's term may be about to calm down
The ECB signalled earlier this month it would hold rates at 1 percent when it meets in early March and, with some of the gloom over the euro zone lifting and a deal on a Greek bailout reducing uncertainty, the bank is likely to stay in a wait-and-see mode for a some time - maybe even years.
It has sucked much of the heat out of the euro zone crisis by funnelling banks nearly half a trillion euros in 3-year funds late last year - a step it took together with back-to-back rate cuts in the first two months of Draghi's ECB presidency.
Draghi said that after banks stocked up on the funds "a major, major credit crunch" had been averted. A second chance for banks to access the cheap cash next week is expected to ease money market tensions further and improve loan availability. Another half a trillion euros is expected to go.
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"For the moment, they are on hold (on rates), the main reason being that rates policy is based on their assessment of the economy and inflation outlook, not the debt crisis," Rabobank economist Elwin de Groot said.
"The key point of ECB policy has been that it's not so much the price of money, it's the volume that is the problem."
The three-year funding operations are addressing the volume issue. A Reuters poll of over 60 economists showed a mid-range expectation for the ECB to allot 492 billion euros next week - a similar sum to that fed to banks at the first window.
With the funding issue taken care of, interest rate policy can focus on the outlook for inflation and the economy, which is more benign than just a few months ago. There is even market talk of "green shoots" - a return to growth after the crisis.
After a dip in economic activity late last year, the economy is gearing up again.
The ECB has spoken of tentative signs of stabilisation, and the German central bank said on Monday that many estimates for global growth were overly pessimistic and added that the country would return to growth swiftly this year.
Euro zone consumer confidence edged up in February, a survey published on Tuesday showed. Even the purchasing manager indices released on Wednesday indicated that the economy remains fragile, though the manufacturing index climbed from the prior month.
Google Trends data shows that the phrase "green shoots" started to reappear in news articles at the end of last year after an absence of almost two years.
These positive trends have seeped into markets - the FTSEurofirst 300 stock index is up more than 20 percent in the past three months.
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