---- by STUART WILLIAMS ----
FRANKFURT (AFX) - The European Central Bank is expected to leave interest rates unchanged today, after indicating inflation remains too high for an immediate cut in interest rates to be possible, economists said.
The ECB's concern about inflation, signalled clearly at a hawkish news conference from president Wim Duisenberg earlier this month, means it may not cut interest rates until June at the earliest, the economists added.
In a poll of 33 economists carried out last week by AFX News and Agence France-Presse, 30 said they expect no change in rates at Thursday's meeting. A clear majority said the ECB will hold back until June before cutting interest rates.
Economists said the main concern for the ECB is that inflation shows no sign of easing towards its stability ceiling of 2.0 pct until June at the earliest, after March HICP figures showed euro zone inflation stuck at 2.6 pct year on year.
Holger Fahrinkrug, economist at UBS Warburg said only from June can "meaningful relief" be expected on the inflation front. "Taking the ECB at its word suggests that this is the earliest month to provide a justification for a rate cut."
"The ECB will maintain its wait and see policy until we see inflation coming down to 2 pct", said Denis Errica at Banca Internazionale di Gestione.
Economists said of particular concern to the ECB is the rise in the core component of inflation and especially the recent unprocessed food price rises brought on by the BSE and foot and mouth disease crises. "We still predict a rate cut in the second quarter, but the whole process is being thwarted by food price rises", said Rob van der Wijngaert, economist at ABN Amro.
In its recent April monthly bulletin, the ECB warned further price pressures from the farm crises cannot be ruled out, meaning that the moderation of HICP inflation towards 2.0 pct may be "delayed." Italian cities April CPI figures this week indicated that inflation still shows little sign of abating, rising 0.4 pct from March.
Preliminary German CPI figures from the major states have also shown strong rises from last month, with Bavaria reporting a 2.8 pct rise year on year.
Economists said the ECB also remains upbeat on prospects for growth in the euro zone this year, with Duisenberg insisting that the economy will grow at or above the trend growth level of 2 pct to 2.5 pct.
"As long as it (the ECB) believes that range will not be undershot, it will see no need to provide monetary stimulus, especially while fiscal policy is not loosening", said UBS Warburg's Fahrinkrug. At the EU finance ministers meeting in Malmo over the weekend, Duisenberg said the ECB remains sure of "weathering the storm" that is hitting the world economy this year.
However U.S. Treasury Secretary Paul O'Neill said he was "mystified" by Europe's confidence it could escape the worst effects of the economic slowdown this year.
"There appear to be some misconceptions on the U.S. side", Duisenberg was reported as replying.
While the ECB maintains its hawkish stance on inflation, economists see little hope of sustained pressure from euro zone politicians or other world policy makers having any effect on its monetary policy. At the summit in Malmo, Austrian Finance Minister Karl Heinz Grasser called explicitly on the ECB to cut rates, while IMF managing director Horst Koehler has urged the ECB twice publicly to relax its monetary policy.
"The politicians have a primary objective and that is to be re-elected and their comments do not influence the ECB", Guillaume Menuet at 4Cast said. "Privately however the politicians will exchange views", he added.
Spain's Finance Minister Rodrigo Rato signalled some finance ministers are prepared to toe the ECB's line, denying a comment by Grasser that a majority want a cut in interest rates.
Although all economists in the AFX/AFP poll are betting on a rate cut of at least 25 basis points this year, some have said there is an increasingly real risk scenario emerging that the ECB will keep rates on hold for the entire year.
Anja Hochberg at Credit Suisse said according to her forecasts inflation will end the year at 2.3 pct, stubbornly above the key stability ceiling. "The probability of a rate cut this year has fallen, but the likelihood remains over 50 pct", she said.
"So what is the possibility of no rate move at all? Well, there is a chance", said Kelly Tonkin at Lehman Brothers. "Historically these are not high levels of interest rates, although we do see a largely symbolic move", he added.
Some economists also believe the ECB has missed a window of opportunity to cut rates that will not reopen for some time to come. Eckhard Schulte at Dresdner Kleinwort Wasserstein said the ECB's next opportunity to move will not be until June. "The level of interest rates is simply too high ... inflation has been determined mainly by special effects."
The president of Germany's Ifo research institute, Hans Werner Sinn, said last week that deflation, rather than inflation, could prove to be the main long-term threat to the German economy, as prices fall uncomfortably quickly from their current highs.
Schulte said this could box the ECB into an uncomfortable corner after warning of inflation risks for so long.
"In a year's time we could have a completely different debate -- this time about deflation. It would be a very difficult debate for the ECB to communicate", he said.