ROME, April 3 - European central bankers steering by an unsteady compass through the turbulence of war have signalled they will hold interest rates firm at their meeting on Thursday, even though the economy is deteriorating. The European Central Bank wants to wait a few more weeks to assess the depth of the economic fallout from the Iraqi war before deciding how sharply to cut official euro zone rates, analysts said. The ECB's governing council is meeting in Rome and will announce its decision at 1145 GMT, followed by a news conference chaired by bank president Wim Duisenberg at 1230 GMT. Even if the council does hold its fire this time, few doubt that an interest rate cut is coming by June. Economic data for March show business and consumer gloom deepening in Europe and the manufacturing sector back in recession, making the 2.50 percent official euro zone rates look increasingly restrictive. But just like the U.S. Federal Reserve, which has said the war makes economic data and forecasting highly unpredictable right now, the ECB wants more certainty before acting.
"Military experts are saying that the duration of the war with Iraq will become more certain in the next week. All the deterioration we have seen in recent weeks can be attributed to the uncertainty over the war. The ECB will want to wait until that is clarified," said Julian Callow, chief European economist at CSFB in London. Oil prices have tumbled 23 percent in three weeks to $26 , helping the growth outlook, and sentiment could rebound quickly if the U.S.-led attack on Baghdad is soon over. Even so, the ECB is coming under increasing pressure to cut. Global bankers and policymakers who are members of the lobby group the International Institute of Finance on Tuesday urged rich nations to lean toward lowering interest rates to bolster faltering world growth. OECD Chief Economist Jean-Philippe Cotis said in a newspaper interview on Wednesday that the ECB has ample room to cut rates by a significant amount. And Germany's Economy Minister Wolfgang Clement said industrialised nations must prepare for the worst-case economic scenario.
COLLATERAL DAMAGE
ECB policymakers likewise are showing mounting concern. "I would not rule out slowdown for the European Union the way things are shaping up, with the economic growth rate slowing below one percent," ECB governing council member Nicholas Garganas from Greece said on Tuesday. That is remarkable considering it was only a month ago the ECB revised downward its official growth forecast to one percent from 1.1-2.1 percent. Ernst Weltke, another ECB governing council member, also sounds worried. "A long-lasting Iraqi war would darken the economic perspectives for the world economy," he said last week. Yet no central banker has signalled he or she is ready to cut interest rates this month unless absolutely needed. ECB executive board member Eugenio Domingo Solans summed it up thus: "The fact is that the Iraq crisis means that we have a lot of uncertainty about future developments, and therefore we should first try to emit as much confidence as possible to the public. Then we should see what the outcome of war is." In a survey last week, 37 of 55 ECB watchers said they expected a rate cut in May, with five more saying it could come in either April, May or June. Financial markets have priced an 80 percent chance for a rate cut by the end of June.
The difficulty facing the ECB is that all the data it has to make its decision were collected before fighting began on March 20. High anxiety depressed activity but that may prove temporary and the ECB does not get any war data until April 15 when the German ZEW economic sentiment index is published. Yet many economists say sufficient damage already has been done. Euro zone economic sentiment skidded to a six-year low in March of 97.8, down from February's revised 98.4 with consumer sentiment plunging. The manufacturing sector slipped back into recession in March and a strong euro, up 3.2 percent this year to $1.08 , is hurting exports. "Looking at the data, they will have to cut at some point. There is no obstacle to it. But the ECB continues to have this view that it does not pay to be too activist," said Jose Luis Alzola, economist at Salomon Smith Barney. The ECB cut rates by 0.25 percentage points on March 6 and officials have indicated they want to save their diminishing store of prospective further reductions to have the biggest impact, he said. Indeed, the ECB may not be sure a cut is worth while quite yet. Since fighting began, stock markets have proved volatile but are well off their March 12 lows and have erased only half the gains posted ahead of the war in hopes of a quick victory.
Anecdotal reports also suggest only a slight knock to consumer activity, which makes up 60 percent of the 12-nation euro zone economy, since the fighting began. French electrical goods retailer Darty has said war was depressing its sales. But boycotts of mega U.S. brands fast-food restaurant McDonald's and Coca Cola appear limited. And the world's fifth largest retailer Metro of Germany said only a year-long war would have a major impact on its sales. All the same, Callow expects the ECB to signal it will cut in May when he forecasts a 0.50 percentage point cut.//