---- by Steve Whitehouse ----
PARIS (AFX) - The European Central Bank is gearing up for a further interest rate cut as growth prospects weaken and the inflation outlook improves, but it may not be ready to move at today's governing council meeting, economists said.
Some economists expect the ECB to cut rates at today's meeting, but many expect the central bank to wait until the next council meeting on Nov 8.
In a poll of 36 economists last week by AFX News and Agence France-Presse, 14 predicted a cut at this week's meeting and the same number forecast a Nov 8 easing move. Three predicted a rate cut at one of the two meetings.
The remaining five economists forecast that the ECB will lower rates at some stage in November without specifying a date. Most expect the minimum bid rate on main refinancing operations to be cut to 3.50 pct from the current level of 3.75 pct.
Some economists said Friday's West German Ifo survey has increased chances of a rate cut this week. The Ifo business climate index fell to 85.0 in September from 89.5 in August. The decline was the largest since Nov 1973.
Rodolfo Dozio of Comit said the Ifo figures prompted him to bring forward his forecast for the timing of the rate cut to this week from Nov 8.
He said the Ifo figures point to a decline in euro zone GDP in the fourth quarter.
"The Ifo index...is a very good leading indicator for GDP growth...and this level suggests negative growth," he said. "This Ifo figure is a real setback," said Ditmer de Vries of Rabobank.
Pasi Kuoppamaeki of Leonia agreed.
"Ifo certainly has an effect on growth expectations and inflation prospects," he said.
But others said the ECB may be reluctant to put too much store by the Ifo survey.
ECB president Wim Duisenberg has previously insisted that the central bank does not react to national data but prefers to wait for aggregated euro zone figures, and the central bank has also expressed caution about the value of survey data for the period following the Sept 11 terrorist attacks on the US.
"These surveys were conducted too soon after the tragic events to allow respondents to formulate a thorough analysis of their implications," it said in its October monthly bulletin.
And Bundesbank president Ernst Welteke said the German economic situation is better than the Ifo figures suggest.
Ulla Kochwasser of Industrial Bank of Japan agreed that the ECB should not give too much weight to the survey data.
"Current sentiment data is likely to include a lot of psychological momentum and could simply be an overreaction," she said. In any case, ECB statements do not suggest that the council is in a great rush to cut rates, economists said.
After the last council meeting in Vienna on Oct 11, Duisenberg 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.
Last week Bank of France governor Jean-Claude Trichet said ECB policy should remain cautious and pragmatic, while ECB chief economist Otmar Issing said the central bank's Sept 17 rate cut could be seen as a "frontloading" of an easing move which would have had to be considered anyway.
"The ECB reacted to the US terror attacks very quickly. As Duisenberg stated in the last press conference, the bank does not have any immediate reason to do more," said Sirpa Wallius of Nordea. Lorenzo Codogno of Bank of America said it would therefore be premature to expect a rate cut this week. "The ECB does not appear ready yet for an interest rate cut, especially because it would be highly embarrassing following the strong statements of only two weeks ago and it would be taken as a departure from its non-activist long-term approach," he said. The Nov 8 meeting may also be a more likely timing for a rate cut because it is followed by a news conference and because this week's meeting is being held by teleconference, suggesting that a rate change may not be on the agenda, economists said.
Economists say the ECB is still too optimistic on growth and will have to revise down its forecasts as new data emerge, but they say the trigger for the rate cut will be an improvement in prospects for inflation, which is always the central bank's main concern. And here a shift in the ECB's rhetoric can be detected, with several council members speaking of increasing confidence that inflation will come back below its 2 pct price stability ceiling soon. Inflation eased to 2.5 pct in September from 2.7 pct in August. The ECB is currently forecasting that inflation will fall below 2 pct early next year, but Duisenberg said on Friday that there is scope to cut interest rates if inflation falls "earlier or further" than currently forecast.
In the days before Duisenberg's comments, Issing had spoken of the ECB's increasing confidence that inflation will fall below 2 pct, while the monthly bulletin said there were good reasons to be confident that inflation will continue to decline.
"The medium-term inflation outlook has clearly improved due to slower growth, some appreciation of the euro and a lower oil price," said Nico Mensink of ABN Amro. This week's preliminary German consumer prices data for October could give the ECB the evidence it needs to justify a rate cut, probably at the Nov 8 meeting, said Stephan Rieke of BHF Bank. Most economists expect the ECB to cut more than once between now and the end of the year as the inflation picture brightens, with 22 of the 36 economists predicting that the refinancing rate will be down to 3.25 pct by year-end.
The only thing that would get in the way of such easing is excessive pressure from politicians for lower rates, economists said. Euro group president Didier Reynders, French Finance Minister Laurent Fabius, German Chancellor Gerhard Schroeder and EU Commission president Romano Prodi have all voiced their opinions on the ECB's scope for monetary easing.
The ECB has never reacted well to calls for rate cuts from politicians, sometimes delaying an easing move to avoid being seen as yielding to political pressure.
And council members have on this occasion openly disagreed with the analysis of some politicians. Welteke said political demands for rate cuts exaggerate the ECB's room for manoeuvre, and Trichet echoed his remarks.
"Certain people are advancing the idea that we have a great room for manoeuvre and that we are using it parsimoniously. That's not at all our impression," he said.
However, there are tentative signs that politicians and central bankers may be reaching an understanding on comments on interest rates.
At last week's Ghent EU summit, EU leaders toned down a draft statement on interest rates which had said that "reduced inflation should provide room for monetary authorities to take further decisive action".
The final version of the statement simply noted that a further improvement in inflation prospects would provide room for manoeuvre for monetary policy.
Delegates said the initial draft was considered too "impolite" towards the ECB and that leaders did not want to be seen to be putting undue pressure on the central bank.