LONDON, Oct 30 - The European Central Bank will not change interest rates next week nor is it likely to push up the cost of borrowing until at least the second half of 2004, according to a poll. All but one of the 70 economists in the October 28-30 poll said the ECB will leave the benchmark refi rate at 2.0 percent at its November 6 monetary policy meeting. One expected a 25 basis point cut. "There is no trigger for a rate change at the next meeting," said Holger Fahrinkrug at UBS in Frankfurt. "The economic recovery is still fragile and the stronger euro would not suggest any risk of excessively strong growth going forward." Of the 67 economists who answered the question, 48 think rates have reached a floor. Twenty-eight said if there is no change in rates in November the next move will be a 25 basis point rise, 14 expected a 50 basis points hike and six were undecided. Most saw the rise in the second half of 2004 or later. All but three of the 19 economists seeing more falls expect rates to go down in December or the first quarter of 2004. The euro zone's economic recovery, which has been tentative to-date, lagging that of the United States, is expected to gain pace in 2004.
The ECB is likely to wait until recent positive sentiment indicators are backed up by real economic data and falling unemployment before plumping for its first rate hike since October 2000. "They need to be comfortable with the idea that the recovery is firmly established, that growth is back on a two percent plus trend (on the year) and I think then they would be willing to take back some of the easing that they did," said Joachim Fels at Morgan Stanley in London. In the second quarter, the euro zone economy grew just 0.2 percent year-on-year, but economists expect growth to pick up to 1.7 percent in 2004.
POWER OF THE EURO
If the recovery brings with it higher inflation, the central bank will be encouraged to raise rates, as cheap borrowing fuels spending and puts an upward pressure on prices. For the moment inflation -- at a notch above the ECB's tolerance threshold of two percent -- is not seen as a major worry for the ECB, though higher oil or commodity prices could tip the balance. On the other hand, if the euro appreciates further against the dollar, rendering European exports less attractive to the international market, external deflationary pressures could be on the cards. Economists said that the ECB could well decide the economy deserved another boosting rate cut if the single currency reached $1.25-1.30 levels from around $1.17 currently. "A quick and sustained appreciation of the euro versus the dollar above 1.25 within the next months would, in our view, lead to a further interest rate cut of 50 basis points," said Gottfried Steindl at RZB in Vienna, who otherwise expects at rate rise in early 2005. The mid-range forecast showed steady rates for the rest of this year, edging up to 2.25 percent by the end of 2004, unchanged from expectations ahead of the October ECB meeting. Forecasts for the end of next year ranged from 1.5 percent to three percent.//