The European Central Bank looks set to keep interest rates on hold for the 15th month running on Thursday with the focus of attention its view on an economic recovery that remains in a delicate phase.

After a run of strong euro zone data and the success of bank stress tests in calming markets somewhat, ECB President Jean-Claude Trichet is expected to reaffirm that rates remain appropriate, bolstering expectations they will remain on hold well into next year.

The ECB's 22 policymakers started their meeting on schedule at 0700 GMT. Its post-rate decision news conference will be studied for signs of whether the ECB sees the euro-zone economy maintaining recent signs of improvement.

Trichet should be in a sunny mood. The data have continued to improve and the euro zone's sovereign debt troubles have moved out of the spotlight, said Societe Generale economist Klaus Baader.

The stress tests, which the ECB had a major hand in, can also be seen as quite a success. Bank stocks have been rising, and the increased level of transparency has certainly been welcomed.

Trichet will also be pushed for an early hint on whether banks will continue to have access to unlimited ECB cash for the rest of the year, past the current deadline of October.

The decision is more likely to be held back until next month but prolonging full allotment, especially for longer-term three-month lending operations, would reassert downward pressure on money market rates, which have been rising since the end of March. EURIBOR=

Analysts say better-than-expected stress tests results have already sparked improvement on bank-to-bank lending markets, with higher turnover in short-dated loans, in a hopeful sign that banks can cope with less ECB funding.

The preannounced three-month operation in September will be the last with full allotment. Subsequent three-month operations will go back to being variable-rate tenders, said Baader.

The rise in interbank rates has been supported by banks scaling back their intake of ECB loans and on market expectations the central bank will continue phasing out its support measures.

Citi economist Juergen Michels said Trichet would maintain the relaxed stance he took last month on the steady upwards march in interbank rates.

Trichet is likely to describe the increase in rates as a consequence of the will of banks to tap less of the still unlimited funds available, he said. 


The ECB chief's tone on the state of the economy will be closely monitored by ECB watchers.

In sharp contrast to U.S. indicators, which suggest the post-recession recovery may be flagging, data in the 16-nation euro zone has continued to outperform since the ECB's July meeting.

That divergence has opened a gulf between the ECB and the U.S. Federal Reserve, which has publicly toyed with a return to stronger stimulus along with the Bank of England, also expected to hold fire at its meeting on Thursday.

Euro-zone economic morale hit a 28-month high in July, European Commission data showed last week, while consumer confidence is now at the highest level in more than two years.

Manufacturing growth, the main driver behind the recovery, also accelerated thanks to a strongly-performing Germany. The regional powerhouse reported a record leap in engineering orders, bolstering hopes for the rest of the year.

However, economists warn that growth may falter when the approaching wave of government spending cuts hits. Ireland's central bank warned last week that euro-zone growth was expected to slow in H2 and risks to the outlook were on the downside.

There have been some negative data. An ECB lending survey showed that banks expect to continue clamping down on lending in the coming months despite seeing a pick-up in demand.

Retail sales were also flat in June, pointing to lacklustre consumer spending that could undermine the recovery.

Although recent economic data surprised on the upside, the ECB most likely will stick to its outlook for moderate and uneven growth, said Michels.

Another signal that the ECB is confident about the outlook is that it has slowed its controversial government bond buying programme to a near halt.

We do not expect the ECB to announce an end of this facility. However, unless stress in periphery markets re-emerges, the effective use of the securities market programme (bond buying) is likely to go to zero quickly, said Michels.

(Reporting by Marc Jones; Editing by Ron Askew and Patrick Graham)