FRANKFURT, May 8 - The European Central Bank is expected to hold interest rates steady on Thursday as it awaits a clearer picture on Europe's growth trajectory and evidence of easing inflation. Analysts said they would be highly surprised by a monetary easing now as ECB officials have argued for more time before they move, even though data point to anaemic growth and a surging euro is damping inflationary pressures. Portuguese central bank chief Vitor Constancio was quoted on Wednesday as saying monetary conditions did not stand in the way of recovery, echoing comments last week by Bundesbank President Ernst Welteke and ECB board member Sirkka Hamalainen. "Interest rate levels are already incredibly low and (the ECB) has argued that they are low enough to stimulate economic recovery and two, monetary growth tends to be very, very strong," said Robert Prior-Wandesforde at HSBC in London.
But it seems only a matter of time before the next cut, as there is no evidence of a post-Iraq-war boom and euro zone inflation has fallen to within a whisker of the bank's two percent tolerance ceiling, analysts said. A large majority of economists in a poll last week said the bank would leave its benchmark refi rate flat at 2.50 percent at its Thursday meeting, but would move in June. June Euribor interest rate futures , a gauge of euro zone rate expectations, indicate short-term interest rates around 2.30 percent, roughly factoring in a 70 percent chance of a quarter point cut by June.
The Federal Reserve left interest rates steady at 1961 lows on Tuesday, but opened the door to future reductions by warning of deflationary potential in the U.S. economy.
NEVER SAY NEVER
The warning made some analysts jittery that the ECB may after all move in May, especially with the euro hitting fresh four-year highs above $1.14 on Wednesday, improving the inflation outlook. "With every cent upward move in the euro, I get more uncertain whether they will move as early as May. (However,) it certainly would be a drastic break with their rhetoric," said Klaus Baader at Lehman Brothers. The euro is up 14 percent against the dollar in five months and has risen eight percent versus a weighted basket of currencies of major euro zone trading partners.
"We reckon a one percent cut is needed just to leave the monetary policy stance unchanged from the start of December," Jonathan Hoffman at RBS Financial Markets said in a research note. But the ECB has never reacted quickly to currency moves, arguing they may reverse quickly, and central bankers have signalled they would keep their hand steady.
WEAKER GROWTH, WEAKER INFLATON
The bank still foresees faster economic growth in the rest of 2003, but has scaled down its forecasts. ECB President Wim Duisenberg said in April growth would not exceed one percent this year. That compared with a range forecast of 1.1 to 2.1 percent growth in December. Still high uncertainty has made the bank cautious in giving growth forecasts of late. European economic sentiment is still very weak, despite the the relatively quick end to the war in Iraq. The services sector shrank again in April, though firms grew more optimistic, a survey showed this week. And contraction in the euro zone manufacturing sector accelerated as output and new orders fell in April, the PMI survey showed.
Inflation is behaving accordingly, with a first estimate of the euro zone rate dropping to 2.1 percent in April from 2.4 percent in March, only just above the ECB's two percent limit. A drop in oil prices should help. June Brent crude futures are now at $23.70, against over $30 before the Iraq war. Still, problems remain on the inflation front. M3 money supply growth, a key ECB inflation gauge, remains way above its benchmark levels. And with inflation expectations creeping upward, senior ECB officials have recently told inflation was proving a tougher enemy than expected. That is one reason why the ECB may wait -- again.//