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FRANKFURT : Financial markets will focus on questions over funding for the banking system when the European Central Bank meets on Thursday and will examine the ECB's forecasts for eurozone growth, analysts say.
"People will be interested in hearing what they are going to do in terms of refinancing the banking industry," Barclays Capital economist Thorsten Polleit told AFP.
Although European banks have been put through stress tests to see if they could withstand a fresh major financial shock or widespread loan defaults, signs of renewed tension in financial markets have raised red flags once again.
ECB governors are expected to leave the bank's main interest rate at a record low level of 1.0 percent for months to come and analysts will concentrate on remarks by president Jean-Claude Trichet following the rate decision.
"The focus ... will likely centre on the details of the liquidity provision for the fourth quarter which the ECB is due to clarify," RBS economist Jacques Cailloux said.
The ECB has been helping commercial banks by making unlimited amounts of cash available to keep the money markets working smoothly and ensure credit is available to the wider economy.
Analysts say it will likely continue to do so for the rest of the year.
That is a critical time when banks, including some in peripheral eurozone countries which now rely on the ECB for wholesale funding, close their books.
"We expect Trichet to announce two/three more three-month liquidity operations with full allotment for the last quarter of this year," UniCredit analysts said in a research note.
The growth outlook will also be a key issue as governments try to rein in their separate stimulus spending to ease pressure on public finances.
In the eurozone, the ECB is independent for management of the money supply and interest rates, known as monetary policy, and governments are responsible for economic and budget policy. The two are supposed to be complementary.
Capital Economics analysts noted "fears that weak growth and expensive banking support measures could push government debt in parts of the periphery up to astronomic levels."
Against this backdrop, all eyes will be on the latest forecasts for eurozone growth and inflation by ECB staff in the light of signs that the global economy could slow down again later this year.
Although the previous 2010 growth forecast of 1.0 percent will probably be revised upwards, the 2011 outlook will say much about the ECB's level of optimism, RBS analysts said.
"Slowing foreign demand and renewed tensions in the periphery (eurozone countries) are warning signals that the ECB needs to err on the side of caution," they said.
"The ECB should be very clear in their communication that the risks are to the downside and they should follow the (US Federal Reserve) in terms of saying they will do anything necessary to counter the downside risks should they materialise."
The US central bank has expressed concerns about a "sluggish" economic recovery, highlighting the need to continue some crisis-era spending in an effort to keep the economy on track.
The latest readings of manufacturing activity have nonetheless shown a slight improvement in the United States and China, the world's two biggest economies, while the eurozone posted a six-month low in August. - AFP/fa
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