---- by Steve Whitehouse ----
STRASBOURG, France (AFX) - The European Central Bank is now unlikely to lower interest rates at today's governing council meeting following a strong signal from ECB president Wim Duisenberg that the council still sees the current level of rates as appropriate, economists said.
Most economists had been expecting the ECB to cut rates at today's meeting in response to weak economic data, but increasingly hawkish comments from council members now make such a move very unlikely, they said.
This culminated in an unusually explicit statement by Duisenberg, who told the European Parliament on Tuesday that the ECB's June 21 assessment that interest rates were appropriate remains intact. "Since the last meeting of the governing council, there has not been any new information that would justify changing this assessment," Duisenberg said.
Other council members had also indicated that they saw no immediate need to change rates, but until Duisenberg's statement financial markets continued to cling to a belief that the economic data would carry more weight than council members' words and that the ECB would cut rates this week.
ECB board member Tommaso Padoa Schioppa said in an interview with Sunday's edition of Greek newspaper Kathimerini that "we do not for the moment see any need for a further cut". The interview was conducted on June 25.
Chief economist Otmar Issing said the bank was concerned by the euro zone's 3.4 pct May inflation reading, and Bundesbank president Ernst Welteke said it was not clear whether signs of a decline in inflation in June marked the start of a downward trend. Welteke also said it is difficult to justify monetary policy changes currently.
Strong M3 data last Friday had already shaken some economists' confidence in their rate cut forecasts. Adjusted M3 grew 5.4 pct year-on-year in May, up from a revised April growth figure of 4.8 pct. Economists had been looking for a May figure of 4.4-4.9 pct.
"Until the M3 figures, we were forecasting a rate cut, but after the strong rise in M3, it now seems difficult to justify a rate cut, " said Marie-Pierre Ripert of Caisse des Depots.
The adjusted figures exclude non-resident holdings of money market fund shares and units, which the ECB says have been distorting the M3 figures, but they are not yet adjusted for a second source of distortion -- non-resident holdings of other negotiable instruments.
The exclusion of these holdings would be expected to reduce M3 growth by around 0.5 percentage points, so a fully adjusted May figure would still have been above the ECB's 4.5 pct reference value for M3 growth. Even so, the ECB has not sounded any alarm bells about the May figures. Vice-president Christian Noyer said the data did not change the ECB's assessment that M3 is currently not signalling any inflationary pressures, and Duisenberg told the European Parliament that monetary developments remain favourable for price stability. And many economists said on the day of the release that the May M3 figures would not stand in the way of a rate cut because the increase was largely the result of exceptional factors.
In a survey of 37 economists last week by AFX News and Agence France-Presse, 22 said they expected the ECB to cut rates this week, but many have revised their forecasts for the timing of the rate cut in the light of Duisenberg's statement.
"The probability that the ECB will do nothing on Thursday has become much, much larger with Duisenberg's remarks," said Michael Schubert of Commerzbank. "Even more so as they were made in a written statement and not in response to a question."
But Schubert said he still expects the ECB to cut rates before its summer break, which means that it will ease at its July 19 or Aug 2 meetings.
Guillaume Menuet of 4CAST said he has also revised his forecast of a rate cut this week in view of Duisenberg's comment, but he still sees a rate cut at one of the subsequent council meetings.
"The odds were very balanced and there was nothing to choose between July 5 and July 19," he said. "Now it will be either July 19 or August 2 -- we are going to have to see what the data does." A news conference is scheduled after this week's meeting, but not after the July 19 or Aug 2 meetings. The next ECB news conference is not until Aug 30.
It cannot be ruled out that the ECB has again been deterred from cutting rates because of pressure from politicians, economists said. The central bank held off from cutting rates in early 1999 when then German Finance Minister Oskar Lafontaine called for it to ease, and again in April this year comments on the need for rate cuts by euro group president Didier Reynders were thought to have weighed against an easing move.
Last week German Chancellor Gerhard Schroeder said he expected the ECB to "take its responsibilities" and noted that the central bank has to consider growth when setting monetary policy.
The IMF also said it expects to see further room for ECB rate cuts as inflation eases, but the IMF's message is much more muted than in the spring when it said the ECB urgently needed to ease policy. Its latest comments also contained praise for the ECB's monetary policy strategy of first raising interest rates to preserve price stability and then easing in May to support growth.
The US Federal Reserve's rate cut last week probably has had no major impact in the ECB's thinking, but it is possible that comments attributed to a senior Bush administration official may be playing a role in its deliberations. The Wall Street Journal Europe quoted the official as saying that the Bush administration wants the ECB to "ease up quite a bit".
With a G7 finance ministers meeting taking place in Rome on Saturday, and the G8 summit following two weeks later in Genoa, the ECB may want to avoid being seen to be responding to political pressure, from Europe or elsewhere, economists said.
Some economists said Duisenberg's comments do not completely rule out a rate cut this week, because the ECB cut rates on May 10 when council members' statements had signalled precisely the opposite in the run-up to the meeting.
Lehman Brothers economist Klaus Baader said he is sticking by his forecast of a 25 basis points rate cut this week.
"What Duisenberg said makes me a lot more uncomfortable with my forecast, but I will not change it now," he said.
"You would be mad to run with that (Duisenberg's comment). If you had followed the ECB's previous indications on monetary policy you would have been badly wrong," he said.
But some economists said the ECB did not like being criticised for surprising markets on May 10 and it is therefore unlikely to want to leave itself open to the same charge a second time.
Schubert said that since May 10 the ECB has voiced arguments both for and against a rate cut.
"In our view, this is a reaction to criticism directed at the bank after its surprise move in May. It will not now be so easy to accuse the ECB of putting the financial markets on the wrong track," he said.