---- by STEVE WHITEHOUSE ----
PARIS (AFX) - The European Central Bank will leave interest rates unchanged at its governing council meeting today, with recent economic data and comments from council members ruling out any cut in rates until June at the earliest, economists said.
In a survey of 30 economists last week by AFX News and Agence France-Presse, 29 said they expect the ECB's main refinancing rate to be left unchanged at 4.75 pct today. None of the 29 expected any move in rates before June, and many said rates will only be reduced in the third quarter.
A month ago, financial markets were firmly expecting an imminent cut in rates, but these expectations have virtually evaporated following evidence of persistent inflation pressures and a consistently hawkish message from the ECB.
"This shift in interest rate expectations is mainly, but not exclusively, a reaction to the data flow. To some extent, it is also a result of successful ECB communication efforts, helped by the clear improvement in the discipline of central bank officials," said Holger Fahrinkrug of UBS Warburg.
The result is that rate cuts are not expected to come as quickly as was thought earlier, but they are still expected.
Frederic Pretet of Credit Agricole Indosuez said he still sees 75 basis points of cuts this year, but now expects them to come later in the year, with a first 25 basis point cut in the third quarter and a further 50 basis points in the fourth.
"We are sticking to our target of an end-year rate of 4 pct, but we have put back the timing," he said.
The shift in expectations has been driven partly by ECB president Wim Duisenberg's success in getting all council members to sing the same hawkish tune on inflation worries.
This contrasts with the mixed messages given in March and early April, when comments from ECB chief economist Otmar Issing and Bank of France governor Jean-Claude Trichet fuelled hopes of an imminent easing move.
The March increase in M3 money supply growth to 5.0 pct year-on-year from 4.7 pct in February surprised markets and broke the long-term declining trend in monetary growth.
Bundesbank president Ernst Welteke said the data showed that the ECB was right not to reduce rates earlier, and economists said they preclude any move by the central bank in the weeks ahead. "With M3 back to 5 pct and inflation rising in the short run, there is little room for a rate cut soon," said Julian von Landesberger of Hypovereinsbank.
Euro zone inflation remains well above the ECB's 2 pct price stability ceiling and the central bank would send the wrong signal if it cut rates before inflation starts to ease, economists said. It reached 2.6 pct in March and German and Italian data already released suggest that it will accelerate to 2.8 or 2.9 pct year-on-year when April data are released on May 16.
"In view of the bad news likely on inflation in the short term, the ECB will prefer to opt for the status quo. We cannot see any move in rates until the inflation figures are showing a clear downward trend, so not before the end of the summer," said Marie-Pierre Ripert of Caisse des Depots.
Elga Bartsch and Joachim Fels of Morgan Stanley Dean Witter said inflation could even touch 3 pct before it starts to decline. The ECB's decision not to cut interest rates in April -- in the face of pressure for an easing move from politicians and international organisations such as the IMF -- was widely criticised at the time. However, recent inflation data have suggested that the central bank might have been right to stick to its hawkish line and some economists now say that the ECB has gained credibility from the episode.
"The inflation rates have confirmed the ECB's position," said Rainer Guntermann of Dresdner Kleinwort Wasserstein. "The ECB has been very careful as its credibility is in play...it has not damaged its credibility."
Nevertheless, the ECB still faces calls for monetary easing. Last week the OECD said it expects the ECB to lower interest rates by 0.50 percentage points in the near future, and the IMF continues to argue for an ECB cut.
G7 countries outside the euro zone also want the ECB to play its part in supporting global growth by delivering the cuts which all other G7 central banks have made. Canadian Finance Minister Paul Martin told the recent IMF meeting that any further delay in easing by the ECB "could prove costly".
Euro zone politicians, led by euro group president Didier Reynders, continue to call for the ECB to look at the broader economic picture, and not just inflation.
However, such calls may only serve to make the ECB more reluctant to cut rates, because of its determination to demonstrate its independence from outside pressures.
Even so, all economists surveyed see an easing move eventually -- 13 predicted a June easing move and 14 forecast a cut in the third quarter. Two forecast a rate cut in either June or July.
The key to the timing of the cut is likely to be a fall in the inflation rate, which is expected in the third quarter.
"We think a noticeable decline in the inflation rate is not on the cards before the June HICP report due out in late July, and it is likely to take at least until September before headline inflation will recede below the 2 pct ceiling," said Bartsch and Fels.
Growth is also expected to weaken in the months ahead, prompting a further downward revision in 2001 growth forecasts, they said.
"We're expecting a marked weakening in activity and so we see consensus growth forecasts being revised down and the ECB reacting to that sort of activity background," said Gwyn Hacche of HSBC. A further factor in the rate cut decision could be a revision of the way the ECB calculates M3, resulting in a downward adjustment in previous and future M3 growth rates.
The central bank has said it is thinking of revising the calculation to exclude non-resident holdings of marketable instruments, which logically should not be included in the figures and which have led to an upward distortion of M3 growth in recent months.
It has said it plans to make the revision in the course of the year, and economists said the announcement of the revision in an ECB monthly bulletin could be a signal that the bank is preparing to ease rates.
Meanwhile, one economist is still forecasting a rate cut this week. Marc Touati of Natexis Banques Populaires said the ECB needs to ease policy now to stimulate economic growth, as the U.S. Federal Reserve has done.
"For the past few weeks, some economists have had an amusing change of opinion. They often called loudly for the ECB to loosen monetary policy, but now they are saying that its decision to keep rates unchanged is after all justified, or even commendable," said Touati.
"We are sticking to our guns and refuse to take this line of accepting an erroneous strategy which is only designed to avoid 'doing like the Americans'," he said.