12 October 2001, 09:04  FOCUS ECB decision to hold rates steady merely postpones cut to future meeting

---- by Steve Whitehouse ----
PARIS (AFX) - The European Central Bank decision to hold interest rates unchanged today merely postponed a rate cut that will now come at one of the subsequent council meetings, despite apparently hawkish language from ECB president Wim Duisenberg, economists said. "It was not a decision on whether or not to cut. It was just a decision about timing," said Anja Hochberg of Credit Suisse. "More or less all observers agree that there is scope for a rate cut and that the ECB should use it, so probably there were more tactical arguments regarding the best timing of the move that led to this decision," said Christoph Balz of Commerzbank.
"The rate cut is just postponed in our view," he said.
Duisenberg's comments after today's ECB council meeting in Vienna appeared to suggest that the ECB is in no rush to cut rates again, following its exceptional Sept 17 easing move in the wake of the Sept 11 terrorist attacks on the US.
He said the council confirmed its Sept 17 assessment of risks to price stability and current interest rates remain consistent with price stability. And he gave an upbeat assessment of euro zone economic fundamentals, which he said provide a solid base for a recovery next year once the initial shock from the attacks has been absorbed.
But economists said Duisenberg's comments will not prevent a rate cut at the next meeting on Oct 25, or at one of the meetings in November.
"He cannot signal today that they are in a rush to move, because then everybody would ask 'why haven't you cut today?'. So he cannot steer expectations of further rate cuts already at today's press conference," said Balz.
Stephen Webster of 4CAST agreed that the ECB needs to cut further and may well lower rates at its Oct 25 or Nov 8 meetings. Hochberg of Credit Suisse said the ECB will cut rates by a further 50 basis points by November at the latest.
The ECB's key main refinancing rate stands at 3.75 pct following the 50 basis point reduction on Sept 17.
The ECB may have been reluctant to cut rates today partly because of concerns about the impression it would give if it once again matched an easing move by the US Federal Reserve, which lowered rates last week, economists said.
"If they had cut for a third time in six weeks, then they would have conveyed the impression that they are too much in the footsteps of the Fed and that the euro area is in recession like the US and that we have similar structural problems that call for a drastic response from the central bank like in the US," said Balz.
Indeed, Duisenberg said the ECB had decided not to follow the Fed because it is not in favour of "short-term and panicky" reactions to the events of Sept 11.
"It is doubtful if a range of rate changes, coming quickly one after another would enhance confidence," he said. Webster of 4CAST said a reluctance to be seen to be following the Fed may well have been behind today's decision, but it is not a valid reason for holding back from a rate cut that the euro zone economy needs.
The ECB may also have been reluctant to cut rates today because of its aversion to any pressure for rate cuts from politicians. Euro group president Didier Reynders said this week that the ECB has "more room for manoeuvre" on interest rates than the Fed, but Duisenberg responded: "If we have room for manoeuvre it is very little."
But there was nevertheless evidence of a willingness to cut rates as more economic data becomes available on the economic impact of the Sept 11 attacks, particularly in the form of consumer and business sentiment indicators, economists said.
Duisenberg said the ECB will very carefully monitor data to be published in the months ahead, and acknowledged that the terrorist attacks had clearly had a negative impact on economic activity and confidence, which could delay the resumption of higher economic growth.
And economists said Duisenberg hinted that the ECB stands ready to cut rates again when he commented: "We prefer to keep our powder dry." However, there is already plenty of evidence that could have justified a rate cut now, Webster said. As long as the US military response to the attacks continues, people in the US will be nervous and this will be transmitted to Europe, where growth is slowing and unlikely to pick up until the second quarter at the earliest, he said.
"I can't really understand why they haven't cut rates at the earliest opportunity, in the same way as the Fed did," he said. "They seem to be saying they are happy with rates where they are, but as earlier in the year when they minimised the effects of the US slowdown on Europe, I think they are in danger of making the same mistake again."
Hochberg agreed that the likely US recession is bound to affect consumer confidence in Europe, but she said confidence will also be supported by the sharp drop in inflation, which is now under way. This deceleration in inflation will also give the ECB an additional reason to cut rates, economists said.
Rates should come down with inflation, to maintain real interest rates at around 1 pct, said Webster.
ECB rates should therefore already have been at 3.75 pct even before the Sept 11 attacks, and they now ought to be closer to 3 pct, he said.
But despite evidence of slowing growth and inflation, economists said there are also some signs that growth remains relatively robust, which would explain the ECB's decision to wait for a clearer picture before cutting rates.
"The situation at the moment doesn't seem to look as bad as most of us might have thought," said Hochberg, citing recent German data. German private consumption held up well in the third quarter, and the August Ifo survey -- which included some responses which came after the Sept 11 attacks -- was fairly strong, she said. Economists also noted that Tuesday's 2.0 pct August rise in German industrial production was above expectations.

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