The European Central Bank may announce a range of measurestomorrow to stimulate bank lending, said three euro-area officialswith knowledge of policy makers' deliberations.

Options on the table include loosening collateral criteria sothat institutions have more access to cheap ECB cash and offeringthem longer-term loans to grease the flow of credit to the economy,said the officials, who spoke on condition of anonymity because thediscussions are private. Two said an interest rate cut is likely,with only the size of the reduction to be determined for themonthly decision tomorrow.

The ECB is focusing on getting banks lending again rather thanincreasing its government bond purchases to fight Europe's debtcrisis. The central bank's insistence that governments takemeasures to restore investor confidence appears to have paiddividends, with Italian and Spanish yields plunging after Germanyand France agreed to move the 17-nation euro area toward a fiscalunion.

The ECB has indicated it will act to prevent a credit shortageas this falls within its monetary policy remit.

President Mario Draghi said on Dec. 1 that the ECB had “observedserious credit tightening” recently and is “aware of the continuingdifficulties for banks, due to the stress on sovereign bonds, thetightness of funding markets and scarcity of eligible collateral insome financial segments.”

Draghi holds a press conference at 2:30 p.m. in Frankfurttomorrow, 45 minutes after the ECB's rate decision isannounced.

Policy makers may seek to broaden the pool of eligiblecollateral for ECB loans by loosening rules governing the use ofasset-backed securities, the officials said. They may also increasethe amount of uncovered bank bonds that can constitute a lender'scollateral portfolio from the current 10 percent limit, theysaid.

The ECB is already lending banks as much money as they wantagainst eligible collateral for periods of up to a year. It islikely to add two-year loans to its arsenal, two officials said.While a three-year loan has been discussed, it is unlikely at thisstage, they said.

One official said longer-term loans might encourage banks tolend to companies and households, and they would also helpfinancial institutions meet new Basel rules on holding longer- termliquidity.

Economic Projections

Tomorrow's meeting is the ECB's last scheduled opportunity totake policy action this year. It will be accompanied by publicationof the central bank's latest projections, including a 2013inflation forecast that may justify further monetary stimulus.

Draghi said last week that the ECB's goal is to maintain pricestability “in either direction,” suggesting it would act asforcefully to prevent a significant undershooting of its 2 percentceiling as it would to stop an overshooting.

“This applies to both the setting of official interest rates andthe implementation of non-standard measures,” Draghi said.

One official said the economic outlook has deteriorated markedlysince Draghi said on Nov. 3 that the ECB expected a “mildrecession.”

Policy makers will cut the benchmark rate by a quarterpercentage point to 1 percent, according to 53 of 58 economists ina Bloomberg News survey. Only two predict a half-point reduction to0.75 percent.

Bloomberg News

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