---- by Steve Whitehouse ----
PARIS (AFX) - The European Central Bank will leave rates unchanged at Thursday's governing council meeting, with comments from ECB president Wim Duisenberg clearly ruling out early rate cuts, economists said. -
Duisenberg said after the last meeting on July 5 that the council expected rates to remain appropriate "for some time to come". Markets had been looking for a rate cut at the July 5 meeting but had to revise this view when Duisenberg said two days before the meeting that there was no new information to justify a cut. Duisenberg's comments make it unlikely that the ECB will ease before Aug 30, when the council reconvenes after its summer break, economists said.
Of 34 economists polled last week by AFX News and Agence France-Presse, 31 said they expect the ECB to keep the minimum bid rate on its main refinancing operations at 4.50 pct at this week's meeting, with only one of the remaining three unambiguously forecasting a cut this week.
While some forecast an easing move at the Aug 2 meeting which precedes the council's four-week summer recess, a majority -- 19 of the 34 economists polled -- predicted that rates will not be cut until Aug 30 or later.
Some even said that Duisenberg's hawkish stance suggests that rates could be left unchanged for the remainder of the year. The ECB's position is based on a relatively optimistic view of euro zone growth prospects and a cautious stance on inflation risks, and while many economists say they disagree with the council's assessment, they say it would be inconsistent for the ECB to cut rates now, given its views on growth and inflation.
"The ECB has painted this very optimistic outlook for the economic situation, so it's very difficult to change their position without any particular news or any very bad data," said Rodolfo Dozio of Comit. "It's difficult to make a U-turn in a very narrow street," he said.
"The ECB clearly ruled out a rate move at any of the next two meetings. Both the medium-term outlook for inflation and growth are quite favourable," said Ulla Kochwasser of Industrial Bank of Japan. The fact that no news conference is planned after this week's meeting or the Aug 2 gathering also weighs against a rate cut on these occasions, economists said. The next ECB news conference is scheduled to follow the Aug 30 meeting.
David Brown of Bear Stearns said this weekend's Genoa G8 summit also argues against a rate cut this week, while the ECB may be reluctant to cut rates at the Aug 2 meeting because it is followed by the summer recess.
"You've got to rule out July 19 because it comes the day before the Genoa G8 and given the pressure that the US put on the euro zone in Rome (the July 7 G7 finance ministers' meeting) to cut rates, they are definitely going to shy away from July 19 because they won't want to be victim to any claims that they were under undue political influence," he said.
"And Aug 2 is a bit of a no-no because it's the last meeting before the holiday and they always hate being boxed into a corner," he said. Brown said the ECB should cut rates before the summer break, "but the risk is they are going to leave it later rather than sooner". The ECB acknowledges that growth is slowing more than previously expected, but it still expects the euro zone economy to be fairly robust in the face of the global slowdown, predicting that growth will be within its 2.0-2.5 pct estimate for medium-term potential growth this year and next.
And while it expects inflation to decline from the 3.4 pct May peak and fall below its 2 pct price stability ceiling next year, it sees risks to this scenario, particularly from wage rises.
Duisenberg told the last ECB news conference that the forecast that inflation will fall "only just" below the 2 pct threshold next year is based on the current monetary policy stance.
"If we were to change that, we would in all likelihood ... not reach that goal," he said.
In its July monthly bulletin, the ECB also noted that monetary growth has been strengthening recently.
The ECB cited declining M3 growth and evidence that M3 had been inflated by distortions as one of the main reasons for its May 10 interest rate cut, but it now appears to be adjusting its assessment in the light of recent data, economists said.
M3 growth rose to 5.4 pct year-on-year in May from 4.8 pct in April, and the ECB said the figures "confirm a strengthening in the shorter-run dynamics of this aggregate over the past few months". It noted that the seasonally adjusted, annualised six-month M3 growth rate rose to 6.9 pct in May from 6.2 pct in April and 4.8 pct last December.
But many economists say the ECB is wrong in its assessment of growth prospects and inflation risks, and argue that it should already have cut more aggressively. While the ECB has only trimmed rates by 25 basis points this year, the US Federal Reserve has slashed its rates by 275 basis points over the same period.
"They should cut rates now for the sake of the euro zone economy," said Brown.
"Unfortunately the ECB is continuing its incomprehensible policy based on past inflation and denial of a euro zone slowdown that is becoming more and more clear," said Marc Touati of Natexis Banques Populaires.
Touati said the later the ECB leaves it to cut rates, the more it will have to ease.
If it cuts by 50 basis points on Aug 2, no further cuts would be required this year, but if it waits until after the summer break, it will have to cut the refi rate to 3.50 pct or lower, he said. But some economists do detect the first signs of a shift in the ECB's message, which could pave the way for an early easing move. CSFB economists said the July monthly bulletin appeared to contain a greater acknowledgement of the downside risks to growth and a more benign outlook for inflation.
They said they continue to forecast a rate cut on Aug 30, but the ECB could cut before its summer recess if it receives positive inflation data or evidence of a further deterioration in the growth picture. The German June Ifo survey due on July 23 could provide such evidence, they said.
Michael Schubert of Commerzbank said past experience shows that the ECB can change tack at very short notice, and data published over the next few weeks could therefore prompt it to revise its line of argument.
"The ECB is too optimistic about the economic outlook in the euro area. It will have to lower its forecast and therefore acknowledge that the upward risks for prices are less severe," he said.