/www.bloomberg.com/ By Sonja Dieckhoefer
Frankfurt, Jan. 9 (Bloomberg) -- The European Central Bank will probably keep its benchmark interest rate at 2.75 percent today as policy makers wait to see if last month's half-point cut is enough to boost the stagnating economy, economists said.
The ECB's 18-member council hasn't altered borrowing costs at consecutive meetings since it began setting monetary policy for the dozen nations sharing the euro four years ago. The Bank of England will probably keep its key rate at a 39-year low of 4 percent today, a separate survey of analysts showed.
The $7 trillion economy of the euro countries may contract this quarter after expanding at the slowest pace in nine years in 2002, the European Commission has said. Unemployment is at a two- year high as companies including Siemens AG and Alcatel SA trim jobs. Consumer confidence is at a 5 1/2 year low.
``Europe's economy won't grow at all in the fourth and first quarter, pulled down by Germany, where the outlook is even bleaker,'' said Luigi Buttiglione, head of European economics at Barclays Capital Plc in London.
Buttiglione, a former economist at the Italian central bank who contributed to ECB research, changed his forecast for rates on Tuesday. He predicts a reduction in the first quarter, from a previous estimate of no change this year.
In the U.K., consumer spending and rising home prices helped the economy grow at the fastest rate in almost three years in the third quarter. At the same time, manufacturing is struggling to recover from its worst slump in a decade.
Bank of England Governor Sir Edward George, who retires in June, said last week there probably won't be ``a sharp change in interest rates in either direction.''
Further ECB Cuts?
The Bank of England will announce its decision at noon London time. The ECB will follow 45 minutes later. ECB President Duisenberg will have a press conference at 2:30 p.m. Frankfurt time.
ECB policy makers haven't ruled out further cuts. Vice President Lucas Papademos said a rate reduction may be needed should growth and inflation slow further, Germany's Boersen- Zeitung newspaper reported last week, citing an interview.
Unlike the U.S. Federal Reserve, which must try to achieve a maximum amount of employment as well as stable prices, the ECB's primary task is to combat increasing prices. The bank aims to keep inflation -- currently at 2.2 percent -- below 2 percent.
``The currently weak economy makes us expect that there will be no price pressure this year,'' council member Klaus Liebscher said in a speech Tuesday, signaling inflation won't stand in the way of lower borrowing costs.
Interest-rate futures show investors expect the ECB to lower rates by a quarter point before the end of June. The rate on a three-month euro deposit maturing in June was 2.53 percent on Wednesday, compared with a three-month money market rate of 2.86 percent. U.K. Consumers
Bank of England policy makers may not alter borrowing costs at all this year, futures trading suggests. The rate on a three- month sterling deposit maturing in December fell 5 basis points yesterday to 4.04 percent.
Last year was the longest time U.K. rates were unchanged since the 14 months that ended in January 1960. Before then, the benchmark rate stayed at 2 percent between 1940 and 1950.
A surge in house prices has boosted consumer spending, helping Europe's No. 2 economy grow faster than its neighbours. Reg Vardy Plc, the U.K.'s biggest seller of new and second-hand cars, said Wednesday fiscal first-half profit rose 27 percent.
House prices increased the most in October and November since growth rates peaked in 1989, according to HBOS Plc, the nation's largest mortgage lender.
``The boom in the housing market is unsustainable,'' said Brian Hilliard, chief economist at SG Securities in London. ``When the market peaks, there is a growing risk of a sharp correction which will hurt consumer demand.
People are already balking at some purchases. Dixons Group Plc, Europe's second-largest consumer-electronics retailer, said fiscal 2003 earnings will barely grow as shoppers curb spending.
Keep `Powder Dry'
``There is no reason to discuss interest rate changes,'' ECB council member Ernst Welteke said last month. He added the bank still had room to act if needed.
Electrolux AB, the No. 1 appliance maker, will trim 5,091 jobs, or 6.3 percent of its workforce, to reduce costs as demand falters. Jobs will be lost in Italy, Germany and Spain. Alcatel, Europe's largest phone-equipment maker, is shedding more than half its workforce as it tries to return to profit.
RWE AG, Europe's third-biggest utility, sees 2002 profit falling by more than a fifth. KLM Royal Dutch Airlines NV expects its second consecutive annual loss in the year through March as demand for air travel wanes and a possible U.S.-led war with Iraq increases oil prices.
``For the time being, the ECB should keep its powder dry,'' Wolfgang Wiegard, head of Chancellor Gerhard Schroeder's panel of economic advisers, known as the ``Five Wise Men'' ``If the Iraq crisis spills into a prolonged dispute, the ECB should consider another swift cut, possibly even by 50 basis points.''