---- by STEVE WHITEHOUSE ----
PARIS (AFX) - The European Central Bank is likely to cut interest rates at tomorrow's governing council meeting, although recent statements by council members mean that an easing move is no longer a foregone conclusion, economists said.
When the ECB confounded market expectations of a rate cut at its last meeting on March 29, economists said the ECB had probably already decided to lower rates at this week's meeting, when a news conference is scheduled.
But since then statements by senior ECB council members have cast doubt on their readiness to respond to slowing growth with monetary easing.
"We expect a rate cut of 25 basis points, but it's a very close call because the central bankers in Euroland are not very clear in their statements," said Rodolfo Dozio of Comit.
Council members have emphasised that the ECB has a "wait and see" monetary policy stance and that the council is carefully assessing whether the decline in inflation risks will continue.
Some economists said this makes it impossible for the ECB to cut rates this week.
"A rate cut now would be contradictory with that statement," said Luigi Speranza of BIM-IMI.
Andres Munoz of BSCH said the reiteration of the wait and see message by several council members is a very clear signal that there will be no move in rates in the short term.
But most economists continue to predict a cut in rates this week, albeit with less confidence than a week or two ago.
"We are still calling for a cut but definitely not with the same certainty," said Ellen van der Gulik of JP Morgan Chase, who now puts the probability of a cut at only 51 pct.
Neville Hill of CSFB also said that the probability of a rate cut has declined significantly, but still forecasts a move this week "on balance".
Of 37 economists polled by AFX News and Agence France-Presse at the end of last week, 29 forecast that rates will be cut at this week's meeting. All of the remaining eight participants forecast a cut in rates before the end of the second quarter, with several predicting that the easing move will come at one of the subsequent council meetings on April 26 or May 10.
Uncertainty about the ECB's rate-cutting intentions started to creep in the day after the last council meeting, when Bank of France governor Jean-Claude Trichet took the unusual step of releasing ECB president Wim Duisenberg's summary of the council's position at the Franco-German finance ministers and central bank governors meeting in Rouen. The summary confirmed the council's wait and see stance and said the council "is carefully assessing whether and to what extent upward risks to price stability will continue to decline". Duisenberg reiterated the same message last week, and emphasised that price stability remains the ECB's primary goal, adding: "Unfortunately, this is sometimes forgotten." Meanwhile, Bundesbank president Ernst Welteke said risks to price stability in the euro zone have lessened but have not disappeared, and that ECB policymakers are still keeping a careful eye on price developments. Trichet referred again to Duisenberg's summary of the ECB's position on Friday, but also said that the ECB is "very much in favour of growth". The euro zone economy would benefit from a rate cut, but the statement released in Rouen casts doubt on the council's willingness to deliver one at this stage, economists said. "The deterioration of the financial situation should make the ECB decide to lower rates, but the fairly firm tone of the curious statement distributed by Trichet and Welteke (in Rouen) does not make it completely certain," said Philippe Weber of CPR. The Rouen statement may just have been intended to avoid the council being boxed in to a rate cut by market expectations, economists said. Key council members such as chief economist Otmar Issing have in the past had to take steps to avoid giving the impression that a rate decision has already been taken before the full 18-member council meets. Such an explanation would fit with Welteke's explanation that the wait and see stance is reconsidered at every fortnightly council meeting. But the mixed ECB message may also reflect a real divide on the council, economists said. "We interpret the comments (as meaning) that some members are more concerned about inflation risks than others," said Kelly Tonkin of Lehman Brothers. The council has so far always reached decisions by consensus, but for once there is a real division on the council, with Duisenberg in particular appearing to be more hawkish than other key figures, said van der Gulik. Dozio said a consensus for a rate cut appears to be emerging between German and French council members -- Trichet, Welteke, Issing and ECB vice-president Christian Noyer. Smaller countries with higher inflation rates are thought to be less keen on an easing move. "There is a good 60 pct chance of an interest rate cut. There has again been resistance from the smaller countries, but it seems that the key players -- Issing, Trichet -- will hold sway. There will be a serious debate," said Eckhard Schulte of Dresdner Kleinwort Wasserstein. The importance of the personalities involved should not be underestimated, particularly at a time when speculation is rife about Duisenberg's successor as ECB president. Trichet is expected to take over from Duisenberg if and when he steps down before the end of his eight year term, and although neither will comment publicly on the succession issue, markets have read a lot into Trichet's release of the Duisenberg statement in Rouen. Although the ECB said that the statement was released by Trichet and Welteke together, it was Trichet who read it out, and Welteke appeared to be surprised by the move. "The way the statement came out...was not originally intended or planned," Welteke said last week. "It is not the style of the ECB to present this type of statement to the public." Van der Gulik said the release of the statement may have been at the initiative of Duisenberg, who wanted to reassert his authority over the monetary debate. But if this had been the case, the ECB would have been more likely to put out a statement from Frankfurt, rather than just release it to journalists at the Franco-German meeting. Dozio said Trichet may have been asked to read out the statement as "punishment" for fuelling rate cut expectations with dovish comments in the run-up to the last ECB meeting. This is unlikely to be an accurate reflection of the way relations work between council members, but the statement does show how the council attempts to speak with one voice, economists said. Duisenberg doubtless distributes such a summary to all council members after each meeting and expects them to use similar wording in their own comments between meetings, they said. In addition to the neutral tone of the ECB's statements, there are other factors which may also deter the ECB from cutting rates this week. Inflation remains well above the bank's 2 pct price stability ceiling and although it is expected to come down, some council members may be uncomfortable about cutting rates until there is firm evidence of such a decline. "The ECB is for the moment holding to its policy of unchanged rates which is based on its drive for credibility (and independence) in relation to its inflation objective," said Anne Beaudu of Credit Agricole. The ECB's defence of its independence may weigh against a rate cut now, following calls for an easing move from IMF managing director Horst Koehler, the OECD, Germany's six leading economic institutes and the German banking association. And the German and French finance ministries both appear to be looking for a rate cut, although both were cautious about explicitly calling for such a move. German Finance Minister Hans Eichel told reporters in Berlin that central banks "should consider" the slowdown in global growth and French finance ministry sources noted that European growth is weaker than expected with few inflationary pressures. Any overt pressure would make it difficult for the ECB to cut rates because it would not want to be seen to be responding to such exhortations, but none of the comments made so far are likely to be of the sort which would deter the ECB from moving. And the council may conclude that there are more risks to its credibility from not cutting rates than from a decision to ease now, economists said. "We expect the central bank to cover itself against the risks emanating from the world economy by acting on interest rates soon. Otherwise, if there were a sustained economic downturn, the ECB would be accused of unnecessarily hampering economic performance through its rigid stance," said Michael Schubert of Commerzbank. "The risks are increasingly skewed to the downside, and if the ECB does not move and the risks become real it will look as though they have not pursued monetary policy in an acceptable manner," said Tonkin of Lehman Brothers. Whatever the timing of the rate cut, most economists -- 30 of the 37 in the AFX/AFP survey -- expect the ECB to cut the minimum bid rate on its main refinancing operations to 4.50 pct from the current 4.75 pct level. But the other seven predict that the council will cut rates by 50 basis points. "There is a risk scenario that to be done with the speculation once and for all it will cut rates by 0.50 pct," said Anja Hochberg of Credit Suisse.