---- by STEVE WHITEHOUSE ---- PARIS (AFX) - The European Central Bank will leave interest rates unchanged at tomorrow's governing council meeting, with the euro's recent recovery ruling out any need for a rate hike, economists said. Some economists had been looking for a further rate rise in the early part of the year, but the euro's recent recovery means that this will probably be unnecessary and that rates will be left on hold for some time, they said. "The recent euro bounce -- and the prospect of further temporary gains -- suggest that the ECB will not hike rates in coming months. Previously we expected a 25 basis point rate hike in the next six months," said Jose Luis Alzola of Schroder Salomon Smith Barney. The minimum bid rate on the bank's main refinancing operations has been at 4.75 pct since Oct 5. Tomorrow's meeting, the first since Greece's entry into the euro zone, will take place by teleconference and a news conference originally scheduled to follow the meeting has been cancelled. This suggests that a rate change is unlikely and that the ECB is comfortable with its current monetary policy stance, economists said. The euro has rebounded strongly over the past two weeks, aided by signs of a sharper than expected slowdown in the U.S. and expectations of rate cuts by the U.S. Federal Reserve. A stronger currency will help contain inflationary pressures by weighing on import prices and therefore contributes to an overall tightening of monetary conditions. Alzola said the euro is likely to strengthen further, to around 1.00 usd by mid-2001, and this will probably deliver the tightening of monetary conditions which the ECB sees as necessary. Interest rate rises will therefore only be necessary if the euro does not continue its upward move, he said. "The euro rebound is helping to tighten monetary conditions, but the ECB probably will seek somewhat tighter conditions, preferably through a sustained appreciation of the euro or, in the absence of it, through higher short-term rates," he said. "Near term, it would take new disappointment on core inflation or wages to prompt an ECB tightening." The speed of the euro's recovery suggests that it is likely to continue to advance and that the desired tightening will therefore come through currency gains alone, economists said. The euro climbed above 0.95 usd this week after a steady rise since the Dec 19 U.S. Federal Open Market Committee meeting, at which the Fed highlighted the risks of economic weakness in the U.S. Before the FOMC meeting the euro was below 0.89 usd. Lee Ferridge of Rabobank said the euro's gains are fully justified by fundamentals. "Given the U.S. economic background they are sustainable and we would not be surprised to see a test of 0.97 usd before this week is out," he said. "If the U.S. data continues in the same vein as (Tuesday's) NAPM report it could reach 1.00 usd by the end of this month," he added. Deutsche Bank chief economist Norbert Walter said a cut in rates could even be justified if the euro climbs above 1.00 usd, while a rate hike would only be possible if the currency retreats to the 0.90 usd area. There is already some speculation in financial markets that rates could be cut soon, particularly because of expectations of early Fed rate cuts. The decline in oil prices from their September peaks and the recent slowing in M3 money supply growth are also sometimes cited as arguments for an easing of monetary policy. M3 growth slowed to 4.9 pct year-on-year in November from 5.2 pct in October. The short end of the money market is pricing in a cut in leading rates, and rates at this week's variable rate main refinancing operation fell towards the floor provided by the 4.75 pct minimum bid rate. The average rate dropped to 4.78 pct from 4.84 pct at the previous operation, while the marginal rate fell to 4.76 pct from 4.79 pct. But economists said markets may be getting too excited about the possibility of early rate cuts. "In contrast to market expectations, the ECB is unlikely to cut rates any time soon, unless external demand plummets or the euro surges," said Alzola. Recent ECB comments and actions suggest that the central bank retains a tightening bias in monetary policy and that rates may not yet have peaked, economists said. In its December monthly bulletin, the ECB said it "considers the risks to price stability in the medium term under both pillars of the strategy still to be on the upside". This followed a hawkish news conference by ECB president Wim Duisenberg after the last governing council meeting on Dec 14. The council also decided at this meeting to keep its reference value for M3 growth at 4.5 pct, rather than raising it to 5.0 pct as some had predicted. M3 growth is therefore still running above the reference value, making it more difficult to justify rate cuts. The ECB is also likely to remain reluctant to ease policy until it is sure t hat last year's oil price rise has not translated into higher wage increases, which would be seen as a more serious inflation threat. "In some countries, wage demands are very high. The ECB wants to see how these negotiations turn out," said Michael Schubert of Commerzbank. ECB projections on inflation and growth also diminish the chances of an early rate cut, economists said. The central bank published its internal staff projections for the first time in the December bulletin and these pointed to average inflation of 1.8-2.8 pct in 2001 and 1.3-2.5 pct in 2002. The projections are based on an assumption of unchanged interest rates. The ECB's overriding goal is to keep inflation below 2.0 pct over the medium term, so it might be difficult to justify interest rate cuts against a background of such relatively high inflation expectations. Euro zone inflation reached a new peak of 2.9 pct in November and the ECB continues to say that it will be some time before it comes back below the 2.0 pct price stability threshold. It projects 2000 average inflation of 2.3-2.5 pct. The central bank is also bullish on economic growth, despite expectations of a sharp slowdown in the U.S. The staff projections point to euro zone GDP growth of 2.6-3.6 pct in 2001 and 2.5-3.5 pct in 2002, while Duisenberg has said he expects a 3 pct growth rate to be maintained in both 2001 and 2002.