Economists think the European Central Bank will keep interest rates on hold in April but a growing number -- albeit a minority -- expect its next move will be a cut, according to a poll released on Wednesday. All but one of 62 economists in the March 22-24 survey said the ECB's governing council will leave rates at historic lows of 2.0 percent at its April 1 meeting. The one dissenter forecast a cut to 1.75 percent. But opinions are less clear on which way the ECB will next move as economic recovery in the euro zone still looks far from convincing, and following the shock of the Madrid bombings. Of those economists who answered the question, 39 said the next move in rates would be up, with all of these forecasting a hike either in the fourth quarter of this year or during 2005. But that number is down from 49 in a Reuters poll taken before the ECB's March 4 meeting. In the latest survey 16 said the next move would be a cut -- up from 12 a month ago -- with 11 of these predicting the cut would be in the second quarter of this year. The overall number of respondents was the same in both polls but this time only 55 ventured a prediction of the ECB's next move, down from 61 a month ago.
ECB policymakers have long said that rates are no obstacle to recovery. But some economists have detected signs in recent weeks that the ECB is becoming more willing to consider a cut. In an interview published on Tuesday ECB President Jean- Claude Trichet said the bank would reassess its outlook for a gradual recovery if consumer spending fails to pick up. Economists say the recovery is shaky. "The outlook has turned from rather positive in 2004 to increasingly clouded," said Julian von Landesberger at HVB Group in Munich. "(Rate moves) will significantly depend on whether the economy is only taking a spring break on its recovery trajectory or whether more adverse forces are impinging on the recovery momentum, which require additional monetary support." Belgian business sentiment improved in March and Italian consumer confidence also rose, but key euro zone data have largely softened since the start of the year which has led to speculation that the ECB may cut rates in the months ahead. In the poll the mid-range forecasts showed an 80 percent chance that rates will remain on hold in April and a 10 percent chance they will fall to 1.75 percent.
"The April meeting will be a non-event...Trichet will, in all likelihood, repeat the usual mantra that the recovery is expected to strengthen in the coming months," said Gregorio De Felice at Banca Intesa in Milan. "The only possible factor that could make the meetings more interesting is a sharp fall in business confidence such as the Ifo and Purchasing Managers' Index."
CONSUMER FOCUS
Germany's key Ifo survey is due out on Friday. The ECB last changed monetary policy in June 2003. Its minimum bid rate is one percentage point higher than U.S. interest rates, while the Bank of England's main repo rate stands at 4.0 percent. While growth prospects in Britain look bright and another rate rise is expected very soon, the outlook is bleaker in the euro zone because consumers have been worrying about their jobs. Furthermore, last week's bombings in Madrid were seen as hurting economic confidence at a time when the strong euro has already dented business sentiment in the region. Economists say the ECB has room to cut rates, especially after the inflation rate was 1.6 percent year-on-year in February -- its lowest level since November 1999 and well below the bank's 2.0 percent threshold. "The key focus will be on whether the economic recovery remains on track," said Joachim Fels at Morgan Stanley in London. "The ECB will watch consumer spending closely. Major disappointments here...would likely spark a rate cut."
EURO WATCH
The mid-point forecast showed the minimum bid rate at 2.0 percent at end-2004, unchanged from the last poll a month ago. For end-2005, the forecast was 2.75 percent, down from 3.0 in the last poll. Analysts said the euro will remain a key focus for the ECB. The single currency hit an all-time high of $1.2927 in mid-February but has since fallen and was trading around $1.2285 on Wednesday. "We now expect the lack of momentum in the euro zone economic recovery...will eventually lead the ECB to cut interest rates further," said Howard Archer at Global Insight in London. "Although the euro has fallen back...we believe it will make renewed gains against the dollar over the coming months and will be trading back near $1.30 around mid-year." Think-tanks and officials sources say the $1.30 level could prove a decisive "pain barrier" for euro zone industry, where exporters have been complaining that the currency's strength is making it hard to compete for business outside the bloc.////