---- by STEVE WHITEHOUSE ----
PARIS (AFX) - The European Central Bank is certain to leave interest rates unchanged at today's governing council meeting, and although it will probably ease monetary policy in the second quarter, rate cuts will be much less aggressive than in the U.S., economists said.
Of 35 economists polled by AFX News and Agence France-Presse, all said they expect the ECB to keep the minimum bid rate on its main refinancing operations at 4.75 pct at today's meeting.
The meeting was originally due to take place in Dublin as part of the ECB's programme of holding two meetings a year outside of Germany, but the Dublin meeting has been cancelled for the moment as part of efforts to contain the spread of foot-and-mouth disease.
The meeting will now take place by teleconference, and no news conference will be held after the meeting.
Dublin had seemed an unlikely venue for a rate cut in view of Ireland's high inflation rate, but the switch away from Dublin will not make an easing move any more likely, economists said.
"With inflation above target and growth above potential, why in the world should the ECB ease?" said Klaus Baader of Lehman Brothers. "The level of rates is appropriate. There is no tightness for monetary policy and in that sense very little argument for a monetary stimulus to be administered," he added.
The ECB has given a consistent message in recent weeks which leaves little doubt that it is not inclined to lower rates yet.
At the news conference following the last ECB meeting on March 1, ECB president Wim Duisenberg said the ECB's monetary policy stance was unchanged from the neutral position of a month before, and that it was not inclined to change on the basis of currently available information.
And last week he told the European Parliament monetary affairs committee that the ECB is "awaiting signals" before considering a rate move.
He emphasised that there are so far no signs that the U.S. economic slowdown is having a significant effect on the euro zone economy. The central bank's March monthly bulletin, published last Thursday, adopted a virtually identical tone.
"The ECB will be quiet for the moment. The monthly bulletin indicated that they are not thinking of an interest rate cut in the short term," said Stephan Rieke of BHF-Bank.
In particular, Duisenberg has been keen to emphasise that the ECB will not cut rates simply because the U.S. Federal Reserve has eased aggressively since the start of the year and other major central banks have followed.
"The ECB has confirmed its desire not to follow the general move to monetary easing started by the Fed on Jan 3...the ECB will continue with its wait-and-see approach," said Emmanuel Ferry of Exane. Bundesbank president Ernst Welteke has spelt this out even more clearly, telling the Westfalen-Blatt newspaper that it is too early to cut interest rates.
The ECB clearly takes the view that inflation is too high to contemplate a rate cut, economists said.
Although euro zone inflation eased to 2.4 pct in January from 2.6 pct in December, it remains well above the ECB's 2.0 pct price stability ceiling and is likely to increase again in February, economists said. February inflation figures are due to be released on Friday.
Inflation may not drop back below the 2.0 pct threshold before the summer, economists said.
And while the U.S. economic slowdown might be regarded as posing a threat to euro zone growth, the ECB has repeatedly insisted that growth will remain robust and above the zone's 2.5 pct potential rate this year and next. Monetary easing would not normally be compatible with growth above potential, economists said.
The central bank is also inclined to play down the importance of the deceleration in M3 money supply growth, even though it regards M3 as a key determinant of future inflation. M3 growth slowed to 4.7 pct year-on-year in January, its lowest level since the launch of the euro, and is likely to move into line with the ECB's 4.5 pct reference value before long, economists said.
The ECB simply acknowledges that inflation risks from monetary developments have become "more balanced" and in the monthly bulletin it said that the continued strong pace of growth in corporate borrowing requires careful monitoring.
Yet despite its present cautious approach, the ECB is widely expected to ease rates in the second quarter.
In the AFX/AFP survey 29 of the 35 economists predicted a second quarter easing move, with many seeing April as the most likely timing for a rate cut.
The March 29 council meeting is thought to be too soon because it will come on the heels of the March 20 U.S. FOMC meeting, and the ECB will not want to be regarded as simply matching the U.S. rate cut that is expected to come from the FOMC meeting.
But more importantly the ECB will want to see data justifying a cut before considering a change in policy.
The inflation figures are likely to hold the key, economists said. "The ECB is in gridlock as it has a clear mandate to keep inflation below 2 pct," said Alexander Mollerus of ABN Amro. "We stick to our view that the ECB will cut rates in the second quarter of this year, when more evidence emerges that the economy is slowing and, in particular, that inflation is falling."
"We expect the ECB to wait until there are clear signs of inflation receding slowly but steadily, which it is expecting to be the case, before it acts," agreed Michael Schubert of Commerzbank.
Bundesbank council member Klaus Dieter Kuehbacher has even overtly linked the timing of an ECB easing move to a particular inflation level, saying that the ECB will "do nothing" until inflation reaches 2.2 pct in June or July.
Evidence of European fallout from the U.S. economic slowdown would also incite the ECB to lower rates, economists said.
"The ECB is waiting for proof that the economy has been seriously affected by the U.S. slowdown. Up until now the indicators have shown weakness, but have not collapsed. The data will become more unfavourable later," said Rieke.
The ECB's message will also have to change before a rate cut can be regarded as a serious possibility, so markets will be watching closely for the beginnings of a shift in council members' rhetoric.
"The ECB has shifted to a short-term neutral bias in its statements due to increasing global risks, stabilising inflation prospects and slow growth. We would not be surprised by some softness in its statements in coming months, but the actual cut is not on the cards before the second quarter," said Sirpa Wallius of Nordea.
Few economists expect the ECB to ease rates aggressively, with the majority predicting just one or two 25 basis point cuts before the end of the year.
"There is no reason to cut aggressively, but the possibility of getting back to a more neutral rate or of acknowledging the improvement in inflation prospects or the slowdown in M3," said Philippe Weber of CPR.
Moreover, the ECB may also decide to ease rates preemptively as an insurance policy against possible spillover effects from the U.S. economic slowdown, even though Duisenberg has said the council is not thinking along these lines.
"This would ward off any accusations of the bank's inflexibility exerting unwarranted pressure on the economy," said Schubert of Commerzbank.
And the ECB may be giving more serious consideration to the idea of a rate cut than it is saying, some economists said.
"We think the ECB is refusing to explicitly indicate to the markets that it is preparing to ease monetary policy," said Ferry of Exane. The ECB is probably hoping that the narrowing of the U.S./euro zone rate gap will help the euro, and therefore does not want markets to start pricing in ECB rate cuts at this stage, he said.