ECB expected to hold rates as economy lags

FRANKFURT, Germany (AP) -- The European Central Bank is expected to leave its benchmark interest rate at a record low of 0.5 percent on Thursday even though there's still a recession in the 17 countries that use the euro.

The ECB cut its benchmark by a quarter point in May and analysts say it will probably hold off making more changes at its meeting in Frankfurt, Germany, while it assess how the economy is doing.

The eurozone's gross domestic product shrank 0.2 percent in the first quarter, the sixth quarter in a row. The central bank for the currency shared by 331 million people has predicted that the economy will start growing again gradually in the second half of this year. But conflicting economic indicators have left doubt about whether a recovery will come through by then or not. The unemployment rate of 12.2 percent is the highest since the currency union was formed in 1999, adding pressure to find some kind of stimulus.

President Mario Draghi has said the ECB is talking to other European Union officials about ways to encourage banks to lend more to small companies — the backbone of the eurzone's economy. But it is not clear when a proposal might be ready. Markets will be waiting to hear Draghi's comments about the banks possible future plans at a news conference after the rate decision. Analysts say the bank could also lower its growth forecast for this year, from the current minus 0.5 percent.

The ECB's 23-member governing council meets once a month to decide on the bank's refinancing rate. That is the rate at which it loans money to private-sector banks. Through them, the refinancing rate influences how much it costs businesses and consumers to borrow.

Lower rates in theory make it easier to for companies to invest in new production or for people to buy things, and that should stimulate the economy. But that's not how it has been working out in Europe. Lending to businesses remains weak.

But the low ECB benchmark rate is not being passed on by the banks in the countries hardest hit by the eurozone's debt crisis, such as Spain and Italy. Banks remain risk-averse in the aftermath of the financial crisis and new rules limit how much they can lend relative to how much capital they have. Some banks are having trouble borrowing themselves. So credit is hard to come by" and worst hit are small businesses.

The ECB has talked about encouraging banks to bundle small business loans and have them sold off in the form of bonds, which would reap more money they could lend. The practice already exists, but loan guarantees from another European government institution such as the European Investment Bank could spur more of it. It could be next year before something like that can be set up, and ECB officials have recently downplayed how big an impact it would have.