The European Central Bank kept its interest rates on hold on Thursday, and markets are turning their attention to the details of its covered bond purchase plan and any clues on whether rates may yet be cut further.

Analysts are also awaiting the ECB's new staff projections for economic output and inflation for this year and next, which could show scope for further policy easing.

All but 2 of the 78 analysts polled by Reuters correctly forecast the ECB's decision to keep the main refi rate a record low 1.0 percent at its monthly policy meeting.

(For poll, double click , for graph, click

This was no surprise, said Natixis economist Sylvain Broyer. I understand that they want to hold ammunition in rates, but I hope to see further moves toward more dovish statements.

Markets were little changed after the decision. Most analysts believe ECB rates have reached their lowest point and will stay there until at least the end of next year.

However, questions remain on the chances of their falling later. While some ECB policymakers have said they are unwilling to go below 1 percent, President Jean-Claude Trichet refused to confirm last month whether rates were at their lowest point, saying merely that they were appropriate. One in four economists polled saw further easing by September.

We expect Trichet to remain relatively open-minded in terms of further rate cuts, as they do not want to precommit, said Silvio Peruzzo, a Royal Bank of Scotland economist. But he added that he does not expect rates to fall below 1 percent.

Governing Council member Erkki Liikanen said last week that fixing a lower limit was not part of the ECB's policy.

The Bank of England also decided to keep UK rates on hold on Thursday at 0.5 percent.


Trichet has promised to reveal details of the 60 billion euro ($85 billion) covered bond purchase program, which aims to help the euro zone economy out of recession by lowering long-term borrowing costs.

Interest centers on the timing of the purchases and distribution between countries and types of covered bonds -- debt backed by a pool of assets such as mortgage or public sector loans that remain on a bank's balance sheet.

The ECB has said details of the bond buying would be hammered out at Thursday's meeting. The Governing Council will decide what kind of covered bonds the ECB will purchase, with options of buying only mortgage-backed debt, or also considering bonds backed by government debt.

It is also expected to decide whether to buy the bonds on the primary or secondary market, or both.

Markets also want to hear whether the 16-country bloc's central banks will consider further asset purchases, especially of corporate bonds and commercial paper, as some Governing Council members have suggested.

We think the initial size of 60 billion will be confirmed, and the interest is on which assets are deemed eligible, Peruzzo said.

Were the ECB to say it would spend more than 60 billion euros on asset purchases, this could weaken the euro, which hit $1.4337 on Wednesday, its highest level this year, and was trading at $1.4215 on Thursday.


Staff growth forecasts, to be released during Trichet's 1230 GMT news conference, are of great interest. Analysts expect further cuts to the last set of projections released in March, which saw GDP falling between 2.2 and 3.2 percent this year.

The euro zone's economy shrank 4.8 percent in the first quarter of the year from the same period a year earlier.

The (GDP) forecast will come in at about 4 percent contraction for 2009, Broyer said. It will be very difficult for the ECB to keep the hardline stance on rates after the growth forecasts.

The ECB has been more cautious than some of its peers about whether there are signs the economy might be about to recover.

On Wednesday, U.S. Federal Reserve Chairman Ben Bernanke said that while he expected the U.S. recession to end this year, getting government debt under control was vital to ensuring the country's long-term economic health.

($1=.7050 Euro)

(Reporting by Sakari Suoninen; Editing by David Stamp)