ECB governors huddle under deflation clouds

European Central Bank policymakers were to meet in Luxembourg as the threat of deflation rolled over the recession-hit eurozone.

ECB governing council members were nonetheless widely expected to leave the 16-nation bloc's main interest rate at an all-time low of 1.0 percent as they wait to see the effects of dramatic moves already taken.

"Economic and monetary conditions currently prevailing in the eurozone suggest a status quo on rates," Natixis economist Cedric Thellier said as signs began to suggest activity could pick up later this year.

ECB president Jean-Claude Trichet will surely face questions about the threat of deflation however at a press conference following the rate decision.

Eurozone consumer prices fell in June for the first time since records began in 1996, a Eurostat estimate has shown.

The provisional inflation figure of minus 0.1 percent is way below the central bank's target of just under 2.0 percent.

A broad-based decline in prices can incite households and businesses to postpone spending, suppressing activity and threatening jobs which are already being lost at an increasing rate.

As the eurozone wallowed in its first recession ever, the ECB launched a yacht-sized life raft last week, lending banks a record 442 billion euros (626 billion dollars) for a year at 1.0 percent.

It was the bank's first full-year refinancing operation and is due to be followed by two more this year, when the rates could be higher.

The central bank also plans to buy 60 billion euros worth of low-risk corporate bonds to prime business finance markets and has pressed banks to raise lending rather than hoard windfall loans to dress up their books.

"The hope is that the ECB liquidity boost will translate into additional lending to the broader economy, though there is no guarantee that this will happen," noted economist Daniele Antonucci at Capital Economics.

Recent ECB figures showed growth of lending by commercial banks to the private sector slowed in May to a record low, though the figure did not include effects from the central bank's most recent loans.

Commercial banks are trying to limit risks faced by lending to companies and individuals after getting stung during the US subprime crisis and failure of the investment bank Lehman Brothers.

But German central bank governor Axel Weber, a prominent ECB council member, warned last week that if lending did not pick up, the ECB could go around banks and start extending credit directly through the purchase of corporate debt.