2012.05.02 13:01:58 ECB WATCH: ECB To Keep Rates Steady As Inflation High, Economy Weak

-- ECB is forecast to keep the policy rate unchanged at 1.0% -- No major unconventional steps are expected -- President Draghi to confirm ECB's wait-and-see attitude -- Draghi eyed for comments on growth outlook, rate policy stance By Margit Feher Of DOW JONES NEWSWIRES FRANKFURT (Dow Jones)--The European Central Bank is expected to keep interest rates unchanged Thursday as it confronts stubbornly high inflation and the specter of prolonged recession in the euro-zone. All 47 banks and think tanks polled by Dow Jones Newswires forecast that interest rates will remain steady in May for the fifth month in a row, especially prior to presidential elections in France and parliamentary elections in Greece this Sunday. Having cut its policy rate to a historic low by the start of this year and flooded the euro-zone banking sector with three-year loans in recent months, the ECB will resist calls to embark Thursday on further major unconventional policy steps. As several euro-zone governments' commitment to fiscal austerity has been waning, ECB President Mario Draghi will most likely hammer home again that the onus now is on politicians to restore market sentiment. Furthermore, Draghi will probably reiterate that the ECB's remit of pursuing price stability prohibits it from financing governments. Draghi will surely be quizzed at the press conference after the rate decision about his call in the European Parliament last week for a "growth compact." The call was clearly in reference not to stepping up short-term budget spending but to longer-term measures to boost economic prospects. Setting straight the large divergences in economic developments is "the task of governments: they must undertake determined policy actions to address major weaknesses in the fiscal, financial and structural domains," Draghi said. In light of a steeply weakening euro-zone purchasing managers index in April and a record-high unemployment rate in March, Draghi's opening statement will draw close scrutiny for hints that the ECB may have turned more cautious about the region's growth prospects. In April, the ECB said it continues to expect a gradual recovery over the course of the year but "downside risks to the economy prevail" as the sovereign debt crisis flared up again and commodity prices rose. The bank is expected, meanwhile, to leave unchanged its assessment that risks to the inflation outlook are "broadly balanced," with underlying price pressures remaining limited. It will probably stress, at the same time, that it is keeping a close watch on any pass-through from higher energy prices to wages and prices. Various ECB rate setters have said that the monetary policy of all major central banks has been accommodative and that there is no point in the ECB lowering interest rates now. But given the risks of a deeper-than-expected recession and the high level of market uncertainty, Draghi is unlikely to call rates "appropriate" Thursday--which would be viewed as a formal signal that they may remain unchanged for a prolonged period of time. Instead, Draghi may reiterate the ECB's wait-and-see stance: that it is waiting to see more economic indicators and that it could take several more months for the ECB's three-year loans to benefit the wider economy. No hint on a resumption of the ECB's government bond purchases is expected either. The ECB would only buy sovereign bonds again if the debt crisis showed signs of contagion and if the region's bond markets showed even more serious strains. One measure the ECB may take is the extension of its full allotment policy beyond mid-July, which means that it would continue to accept all bids at its liquidity operations without a volume limit against eligible collateral beyond that date. -By Margit Feher, Dow Jones Newswires; +49 69 29 725 509; margit.feher@dowjones.com (END) Dow Jones Newswires May 02, 2012 07:01 ET (11:01 GMT)