9 October 2001, 14:56  OUTLOOK ECB may ease rates on Thursday, but cut is far from guaranteed

--- by Steve Whitehouse ---
PARIS (AFX) - The European Central Bank may cut interest rates again at Thursday's governing council meeting in Vienna, but an easing move is far from guaranteed in the light of recent statements from council members, economists said.
The ECB cut rates on Sept 17 as part of a concerted response by central banks to the previous week's terrorist attacks on New York and Washington, and economists expect it to ease rates again as the ECB takes stock of the impact of the attacks on growth prospects.
But it is not clear that the ECB is ready to follow up its Sept 17 rate cut with another easing move now, even though the US Federal Open Market Committee and the Bank of England both cut rates last week for the second time following the attacks, economists said.
"A rate cut this week is a distinct possibility, but recent official statements lack a sense of urgency, suggesting a move later this quarter," said Jose Luis Alzola of Salomon Smith Barney. In a poll of economists last week by AFX News and Agence France-Presse, 21 of the 33 economists polled predicted that the ECB will cut rates at Thursday's meeting, with 18 forecasting a 25 basis points easing move and three a 50 basis point cut. The key minimum bid rate on the ECB's main refinancing operations currently stands at 3.75 pct.
"For a slow-moving central bank like the ECB, there is always the possibility that they sit on their hands and disappoint the consensus and the markets, but on balance we think they'll follow last week's Fed and BoE cuts," said Sharda Dean of Merrill Lynch.
A deteriorating growth outlook and fading inflation pressures will prompt the ECB to cut rates again, economists said. "The underlying cyclical pattern was and still is weakening. The US events have increased risks for even weaker performance in coming months. Inflation risks have started to decrease due to moderate global and domestic activity," said Sirpa Wallius of Nordea.
And comments last week by Bundesbank president Ernst Welteke show that this is also the ECB's view, economists said.
Welteke said euro zone growth is not only likely to be below 2 pct this year, but also possibly in 2002, and even spoke of risks of deflation.
"Welteke's comments made it quite clear that there will be an easing. His remarks showed it's just a matter of timing. The weakness in the economy will force them for a rate cut," said Eckhard Schulte of Dresdner Kleinwort Wasserstein.
Doubts about the timing of the rate cut mainly result from statements by council members, which suggest that they are in no rush to ease credit again. Nine of the 33 economists polled said the ECB will hold off from cutting rates this week and ease at the following meeting on Oct 25 or in November.
At the weekend G7 meeting in Washington, ECB president Wim Duisenberg expressed confidence that the economic slowdown in the euro zone will be shortlived, and suggested that the Sept 17 easing move could be seen as the bringing forward of a rate cut that was in the pipeline anyway.
ECB chief economist Otmar Issing described the Sept 17 rate cut as an "exceptional response to an exceptional situation", while board member Sirkka Haemaelaeinen said the ECB sees no reason for a new rate move, and Welteke said the ECB is now back to normal after the Sept 17 easing move. Welteke's comments could be taken as indicating that the ECB will revert to taking rate decisions at regular council meetings, rather than repeating the kind of intermeeting move made on Sept 17, but the others' remarks suggest that they may not be looking to cut rates just yet, economists said.
"Recently, ECB officials have been keen to stress that the time of concerted action is at an end, indicating that the ECB might not react immediately to the FOMC's 50 basis point rate cut," said Schulte. Another factor which may prompt the ECB to hold off from easing rates this week is the council's often demonstrated resistance to outside pressure for rate cuts.
Hints from politicians that the ECB should ease rates, particularly at a time when the economic slowdown is likely to lead to a deterioration in government budget positions, could therefore deter the ECB from cutting rates.
Euro group president Didier Reynders said this week that the ECB has "more room for manoeuvre" on interest rates than the Fed, and that the euro zone has more room for manoeuvre on the monetary side than on the fiscal side.
His comments echo those of a high ranking German official, who said declining inflation and lower oil prices "must give (the ECB) more room to lower rates". Although Reynders insisted that it is not his job to tell the ECB what to do, the ECB may well interpret the comments as unwelcome political pressure. Some economists also detect more subtle pressure on the ECB in government statements on the impact of the economic slowdown on the fiscal outlook.
French Finance Minister Laurent Fabius has clearly stated that France will let its deficit rise if necessary to support growth and others have given similar, if less explicit signals. Meanwhile, the ECB has said any deviation from fiscal targets must remain limited despite the economic slowdown, with Duisenberg singling out France, Germany, Italy and Portugal as countries whose budget situations the bank is most closely watching. Letting deficits rise does not mean that governments will breach the conditions of the EU stability and growth pact, which imposes a deficit limit of 3 pct of GDP, but economists said there is an implied threat to the 3 pct limit if the ECB does not do its part by lowering interest rates.
"Euro zone governments are subtly using the deteriorating fiscal outlook to increase pressure on the ECB to ease further," said Schulte. "The governments are no longer guaranteeing sticking to the stability pact's stipulations if the ECB fails to ease further." Even if the ECB chooses to resist outside pressure, this would not prevent it from easing altogether, but would more likely prompt it to delay a rate cut to a time when politicians are refraining from comments on interest rates.
There is little doubt among economists that the ECB will ease at least once before the end of the year. Most economists - 18 of the 33 polled - expect a further 50 basis points of easing between now and the end of the year, to take the refi rate to 3.25 pct. Seven forecast that the rate will be at 3.50 pct at the end of the year, while six predicted a 3.00 pct rate and one 2.75 pct.
Only one predicted no further rate cuts this year, and he forecast a 50 basis point easing move in the first quarter.

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