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.
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.
The ECB also takes comfort from falling bond price differentials between Germany and periphery euro zone countries, though it remains cautious.
A high-level ECB official deplored the herd-mentality of markets that sees them move from panic to calm and back in the flick of a switch. The official said that while the worst of the crisis seemed to be over, the ECB should not be complacent.
Three months from now something in the wider world could throw new stress into the markets, the official said on condition of anonymity.
The ECB cut its interest rates twice late last year to equal the 1.0 percent reached earlier in the financial crisis. With a new man, Draghi, at the helm, the central bank has shied away from indicating that rates have reached a floor.
However, in a news conference after February rate-setting meeting, Draghi signalled that the central bank did not plan to cut rates in March.
We did not discuss any prospective or current change in interest rates, he said.
In contrast, Draghi's predecessor Jean-Claude Trichet said in his last meeting in October that while the ECB kept rates on hold, it discussed the pros and cons of cutting them, indicating that it was prepared to cut rates in November - which it did.
The message of rates being on hold in March was reinforced by the Bank of Finland Governor Erkki Liikanen, who said that was not being discussed now.
If the ECB Governing Council comes to the conclusion that we should go further, there are no technical hurdles to doing that, Liikanen said. But that is not on the agenda at the moment.
Analysts in a Reuters poll are almost evenly split on the chance of a rate cut by mid-2013, with the camp expecting it to have reached the floor gaining strength with the more promising data. Similarly, money market pricing shows that the ECB is not expected to cut rates until late this year at the earliest.
The ECB will also think twice before engaging in a rate-hike cycle. Many analysts believe the bank jumped the gun last year when it raised rates twice, only to have to reverse those increases later in the year. It also raised rates in July 2008, only to cut them in October after the Lehman collapse.
It's our main scenario that they'll be on hold for a long period, until early 2014 and then we'll have an interest rate hike, Danske Bank analyst Frank Oland Hansen said.
They've (hiked too early) twice now, they did it also in 2008, so maybe they've learnt their lesson to be a little bit more cautious, Hansen said, adding that Draghi seemed to have a more relaxed approach than Trichet and was more inclined to keep rates low until he was absolutely sure hiking rates was needed.
Another factor giving the central bank grounds for keeping rates on is that even though the euro zone as a whole could escape a recession or see just a mild one, its most-indebted countries are mired in deep difficulty.
Italy's economy contracted a steeper-than-expected 0.7 percent in the final quarter of last year, throwing the country into a slump expected to last for much of 2012 and joining Belgium, Portugal and Greece in recession.
But as the ECB can set only one interest rate for the whole bloc, it is trying to use other measures, especially the long-term fund offers, to help those countries.
This will probably give a bias to keep rates a bit lower than what (euro zone) average would suggest, Danske's Hansen said. Now business cycles are completely out of sync and that's a huge problem.
(Additional reporting by Emelia Sithole-Matarise. Editing by Jeremy Gaunt.)