By Eva Taylor
FRANKFURT, Nov 5 (Reuters) - The European Central Bank is likely to leave interest rates at a record low on Thursday, resisting pressure for a cut that has grown after a dive in inflation.
After emerging from its longest-ever recession, the euro zone economy is recovering slowly with banks giving first indications that they will ease access to loans for companies.
But demand remains weak as uncertainty persists and euro zone inflation was just 0.7 percent in October, close to a four-year low and far below the ECB's target of close to 2 percent.
Several economists and a politician have called for a cut after the surprisingly weak price data with some forecasting one as soon as Thursday's policy meeting.
However, all but one of the 23 traders polled by Reuters expect the ECB to remain on hold at its November policy meeting, keeping its powder dry until it has a clearer view about where the euro zone economy is heading.
'The ECB simply does not have a reputation for knee-jerk reaction to single data releases,' said ING senior economist Carsten Brzeski.
'A rate cut would do little to kick-start the economy as long as the transmission mechanism is not working properly. Even if deflationary trends have opened the door wider for further ECB easing, we don't expect such action this week.'
ECB President Mario Draghi is expected to strike a dovish tone during the post-meeting news conference, to talk down the euro, which has risen more than 5 percent against the U.S. dollar in the last 4 months, and signal possible action ahead.
Italy's finance minister called on Tuesday for the central bank to ease policy to combat the strong euro.
'If I understand markets they want to see some concrete (policy) action at some point and maybe before the end of the year,' he told the Financial Times.
On the ECB Governing Council, Belgium's governor, Luc Coene, would loosen policy further sooner rather than later.
But euro zone interest rates are already at a record low of 0.5 percent and not all of his colleagues on the Council will argue in favour of another cut when the 23 policymakers gather in Frankfurt on Thursday to set the bloc's monetary policy.
Austria's central bank governor, Ewald Nowotny, noted last week before the inflation data came out that the recovery was 'getting stronger' and that a cut would have little impact. Some recent economic data backs his assessment.
But the European Commission said on Tuesday, inflation would stay subdued in the euro zone and unemployment would hover around current record highs for two years.
It said it expected the euro zone's annual inflation rate to stay at 1.5 percent this year and next before dropping to 1.4 percent in 2015.
Adding to the ECB's dilemma over how to shelter a fragile economic recovery, is an accelerated fall in excess liquidity - cash beyond what lenders need to cover day-to-day operations - as banks repay three-year ECB loans early ahead of an upcoming health check next year.
This is seen pushing the interbank lending rate higher over time and the ECB is considering pumping more liquidity into the system to offset this development.
A Reuters poll showed last week that 44 out 59 analysts surveyed said the ECB would inject more liquidity, probably early next year. It could do so, for example, by launching another long-term refinancing operation (LTRO).
A cut of the main refinancing rate to 0.25 percent could potentially also slow the pace of LTRO repayments, as lower interest costs make it more attractive for banks to hold on to the loans for longer and invest them in higher yielding assets.
The ECB has to think carefully about when it wants to play the rate-cut card. After that only non-conventional tools will be left in its shrinking toolbox and those are significantly more difficult to agree on among the 23 Council members.
The ECB will update its growth and inflation forecasts for the euro zone at the December meeting, which some economists see as the more appropriate date to cut interest rates.
Many expect a downward revision of the ECB's inflation forecasts, especially following the recent increase in the euro exchange rate against the dollar.
Nick Matthews, economist at Nomura, is one of them and he has also pencilled in a rate cut for December, bearing in mind that the ECB has said for months that it wants to keep interest rates at current levels or lower for an extended period.
'The ECB has had an easing bias since July, so this is about what had to happen for there to be a potential rate cut,' he said of the surprise dive in October inflation. 'It gives the momentum to the more dovish contingent on the Council.'
(Additional reporting by Paul Carrel; editing by Anna Willard) Keywords: ECB/RATES
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