10 April 2001, 16:14 OUTLOOK: ECB seen cutting rates Wednesday despite cautious message
---- by STEVE WHITEHOUSE ----
PARIS (AFX) - The European Central Bank is likely to cut interest
rates at tomorrow's governing council meeting, although recent
statements by council members mean that an easing move is no longer a
foregone conclusion, economists said.
When the ECB confounded market expectations of a rate cut at its
last meeting on March 29, economists said the ECB had probably already
decided to lower rates at this week's meeting, when a news conference
is scheduled.
But since then statements by senior ECB council members have cast
doubt on their readiness to respond to slowing growth with monetary
easing.
"We expect a rate cut of 25 basis points, but it's a very close
call because the central bankers in Euroland are not very clear in
their statements," said Rodolfo Dozio of Comit.
Council members have emphasised that the ECB has a "wait and see"
monetary policy stance and that the council is carefully assessing
whether the decline in inflation risks will continue.
Some economists said this makes it impossible for the ECB to cut
rates this week.
"A rate cut now would be contradictory with that statement," said
Luigi Speranza of BIM-IMI.
Andres Munoz of BSCH said the reiteration of the wait and see
message by several council members is a very clear signal that there
will be no move in rates in the short term.
But most economists continue to predict a cut in rates this week,
albeit with less confidence than a week or two ago.
"We are still calling for a cut but definitely not with the same
certainty," said Ellen van der Gulik of JP Morgan Chase, who now puts
the probability of a cut at only 51 pct.
Neville Hill of CSFB also said that the probability of a rate cut
has declined significantly, but still forecasts a move this week "on
balance".
Of 37 economists polled by AFX News and Agence France-Presse at the
end of last week, 29 forecast that rates will be cut at this week's
meeting. All of the remaining eight participants forecast a cut in
rates before the end of the second quarter, with several predicting
that the easing move will come at one of the subsequent council
meetings on April 26 or May 10.
Uncertainty about the ECB's rate-cutting intentions started to
creep in the day after the last council meeting, when Bank of France
governor Jean-Claude Trichet took the unusual step of releasing ECB
president Wim Duisenberg's summary of the council's position at the
Franco-German finance ministers and central bank governors meeting in
Rouen.
The summary confirmed the council's wait and see stance and said
the council "is carefully assessing whether and to what extent upward
risks to price stability will continue to decline".
Duisenberg reiterated the same message last week, and emphasised
that price stability remains the ECB's primary goal, adding:
"Unfortunately, this is sometimes forgotten."
Meanwhile, Bundesbank president Ernst Welteke said risks to price
stability in the euro zone have lessened but have not disappeared, and
that ECB policymakers are still keeping a careful eye on price
developments.
Trichet referred again to Duisenberg's summary of the ECB's
position on Friday, but also said that the ECB is "very much in favour
of growth".
The euro zone economy would benefit from a rate cut, but the
statement released in Rouen casts doubt on the council's willingness to
deliver one at this stage, economists said.
"The deterioration of the financial situation should make the ECB
decide to lower rates, but the fairly firm tone of the curious
statement distributed by Trichet and Welteke (in Rouen) does not make
it completely certain," said Philippe Weber of CPR.
The Rouen statement may just have been intended to avoid the
council being boxed in to a rate cut by market expectations, economists
said.
Key council members such as chief economist Otmar Issing have in
the past had to take steps to avoid giving the impression that a rate
decision has already been taken before the full 18-member council
meets.
Such an explanation would fit with Welteke's explanation that the
wait and see stance is reconsidered at every fortnightly council
meeting. But the mixed ECB message may also reflect a real divide on
the council, economists said.
"We interpret the comments (as meaning) that some members are more
concerned about inflation risks than others," said Kelly Tonkin of
Lehman Brothers.
The council has so far always reached decisions by consensus, but
for once there is a real division on the council, with Duisenberg in
particular appearing to be more hawkish than other key figures, said
van der Gulik.
Dozio said a consensus for a rate cut appears to be emerging
between German and French council members -- Trichet, Welteke, Issing
and ECB vice-president Christian Noyer.
Smaller countries with higher inflation rates are thought to be
less keen on an easing move.
"There is a good 60 pct chance of an interest rate cut. There has
again been resistance from the smaller countries, but it seems that the
key players -- Issing, Trichet -- will hold sway. There will be a
serious debate," said Eckhard Schulte of Dresdner Kleinwort
Wasserstein.
The importance of the personalities involved should not be
underestimated, particularly at a time when speculation is rife about
Duisenberg's successor as ECB president.
Trichet is expected to take over from Duisenberg if and when he
steps down before the end of his eight year term, and although neither
will comment publicly on the succession issue, markets have read a lot
into Trichet's release of the Duisenberg statement in Rouen.
Although the ECB said that the statement was released by Trichet
and Welteke together, it was Trichet who read it out, and Welteke
appeared to be surprised by the move.
"The way the statement came out...was not originally intended or
planned," Welteke said last week. "It is not the style of the ECB to
present this type of statement to the public."
Van der Gulik said the release of the statement may have been at
the initiative of Duisenberg, who wanted to reassert his authority over
the monetary debate.
But if this had been the case, the ECB would have been more likely
to put out a statement from Frankfurt, rather than just release it to
journalists at the Franco-German meeting.
Dozio said Trichet may have been asked to read out the statement as
"punishment" for fuelling rate cut expectations with dovish comments in
the run-up to the last ECB meeting.
This is unlikely to be an accurate reflection of the way relations
work between council members, but the statement does show how the
council attempts to speak with one voice, economists said. Duisenberg
doubtless distributes such a summary to all council members after each
meeting and expects them to use similar wording in their own comments
between meetings, they said.
In addition to the neutral tone of the ECB's statements, there are
other factors which may also deter the ECB from cutting rates this
week.
Inflation remains well above the bank's 2 pct price stability
ceiling and although it is expected to come down, some council members
may be uncomfortable about cutting rates until there is firm evidence
of such a decline.
"The ECB is for the moment holding to its policy of unchanged rates
which is based on its drive for credibility (and independence) in
relation to its inflation objective," said Anne Beaudu of Credit
Agricole.
The ECB's defence of its independence may weigh against a rate cut
now, following calls for an easing move from IMF managing director
Horst Koehler, the OECD, Germany's six leading economic institutes and
the German banking association.
And the German and French finance ministries both appear to be
looking for a rate cut, although both were cautious about explicitly
calling for such a move.
German Finance Minister Hans Eichel told reporters in Berlin that
central banks "should consider" the slowdown in global growth and
French finance ministry sources noted that European growth is weaker
than expected with few inflationary pressures.
Any overt pressure would make it difficult for the ECB to cut rates
because it would not want to be seen to be responding to such
exhortations, but none of the comments made so far are likely to be of
the sort which would deter the ECB from moving.
And the council may conclude that there are more risks to its
credibility from not cutting rates than from a decision to ease now,
economists said.
"We expect the central bank to cover itself against the risks
emanating from the world economy by acting on interest rates soon.
Otherwise, if there were a sustained economic downturn, the ECB would
be accused of unnecessarily hampering economic performance through its
rigid stance," said Michael Schubert of Commerzbank.
"The risks are increasingly skewed to the downside, and if the ECB
does not move and the risks become real it will look as though they
have not pursued monetary policy in an acceptable manner," said Tonkin
of Lehman Brothers.
Whatever the timing of the rate cut, most economists -- 30 of the
37 in the AFX/AFP survey -- expect the ECB to cut the minimum bid rate
on its main refinancing operations to 4.50 pct from the current 4.75
pct level.
But the other seven predict that the council will cut rates by 50
basis points.
"There is a risk scenario that to be done with the speculation once
and for all it will cut rates by 0.50 pct," said Anja Hochberg of
Credit Suisse.
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