ECB to hold fire as economy shows glimmers of hope

The European Central Bank is expected to keep interest rates at a record low of 0.75 percent, refraining from a cut as the euro zone economy shows some signs of stabilising and inflation still tops its target.

The 17-country euro zone is in recession, but recent data points to some stabilisation, and ECB President Mario Draghi might strike a slightly more positive tone in the news conference that follows the rate decision.

The ECB's 23-man Governing Council began its meeting at 0800 GMT to consider this month's policy decision.

A Reuters poll published on Monday pointed to the ECB keeping rates on hold, though the economists surveyed could not agree on the chances of a cut in the next few months due to a murky economic outlook.

"Rates are definitely on hold. Nothing has been spectacular enough in recent data to force the ECB to any action," Deutsche Bank economist Gilles Moec said.

"There is a recession, but no further deterioration. Lending is weak, but also not deteriorating further, so the ECB is not compelled to act."

The Governing Council will find some comfort from improving business morale as well as a survey of purchasing managers, which gave tentative signs that the worst of the downturn may have passed.

"Since the December meeting key figures have generally surprised on the upside," Nordea analyst Anders Svendsen said in a note to investors.

While the ECB had, in Draghi's words, "a wide discussion" on reducing rates last month, the grounds for such a move have not grown and Executive Board members have argued against a cut.

Yves Mersch said last month he did not see the logic of a debate about the ECB cutting its main rate and Peter Praet said there was little room to cut.

Another cut of the refinancing rate would raise the question of whether the ECB would also lower its deposit rate - currently at zero - by the same amount, which would push it into negative territory, essentially charging a fee, for the first time.

Even though Draghi has said the bank was "operationally ready" for such a step, it has grown increasingly wary of the idea over the past couple of months, a source with knowledge of the ECB's thinking said.

Negative deposit rates could deal a hefty blow to money market funds, which have already seen cash outflows since the ECB cut the deposit rate to zero in July. The rate is a peg for short-dated money market rates and at zero it is already almost impossible for funds to generate a return for their investors.

Executive Board member Joerg Asmussen said last month he would be "very reluctant" about the ECB cutting the deposit rate any further, adding that "our (monetary) policy is very accommodative".