---- by Stuart Williams ----
FRANKFURT (AFX) - The European Central Bank is in no rush to cut interest rates early next year, appearing upbeat on prospects for an economic recovery while troubled by surging money supply growth, economists said.
Economists said comments by president Wim Duisenberg at today's news conference do not suggest the ECB will cut rates in January, but an easing is still expected in February as the economic slowdown forces the ECB to act.
"In view of the general tone of the news conference, I think the probability of a rate cut on Jan 3 is less strong than was presumed," said Cyril Beuzit, chief interest rate strategist at BNP Paribas in London.
Commerzbank economist Michael Schubert said: "If Duisenberg said anything it is that the recovery will come relatively soon and we have got be careful there are no price risks in money supply." Economists said the ECB president remains strikingly optimistic about economic prospects for next year, despite the swathe of bleak economic indicators in recent weeks.
Data published today showed German manufacturing orders fell by 0.9 pct in October from September, worse than economists' expectations for a rise of 0.7 pct.
Duisenberg said he is "confident" the euro zone economy will recover in the course of 2002. He even went on to say average growth next year in the euro zone is likely exceed growth in the US. Economists said there is a high chance the recovery will come slower than Duisenberg's rosy outlook suggests, and expect very poor GDP figures for the fourth quarter. Julian von Landesberger, economist at HypoVereinsbank said: "I found him (Duisenberg) quite optimistic on prospects for next year... a vision which we do not share." "I think the new year is going to be the time economies have to deliver, but the problem is that its easy to get into a recession, but very hard to get out of one," he added. Commerzbank's Schubert said rates should still be cut by February at the latest, despite Duisenberg's optimism on the economy. "We do not think the worst is over for the economy. It makes no sense to wait longer (to cut rates) as sentiment gets worse" BNP's Beuzit said there is still room for a 50 basis points cut in the first quarter. "Fundamentally, the euro zone is six months behind the US's economic cycle and this means a recovery is not to be expected before summer."
Economists said Duisenberg, as is customary, did not give too much away in the news conference about future interest rate developments, but one comment on M3 growth raised eyebrows. Duisenberg explained the current surge in M3 growth to well above the ECB's reference value of 4.5 pct does not imply risks for price stability, as it has been triggered by investors switching portfolios into cash due to the current market uncertainty. But he added the ECB will reassess "persistent excess liquidity in the economy", once the uncertainty in the financial market ceases. Economists said this indicates the ECB is still troubled by the strength of M3 growth. Annual M3 growth in October was 7.4 pct, compared with 6.9 pct in September.
Economists said the comment was distinctly hawkish, and is further evidence the ECB is in no hurry to cut interest rates. "It does not exactly suggest they are keen on aggressive easing early next year," said 4Cast economist Guillame Menuet, who still expects 50 basis points of cuts by February. HypoVereinsbank's von Landesberger said he detected a "slight hawkishness" in the comment. "It also is a little bit contradictory to what he has been saying. Money supply does not disappear. It stays," he said.