26 April 2001, 12:54 OUTLOOK ECB to leave rates unchanged today; inflation concerns prevail
---- by STUART WILLIAMS ----
FRANKFURT (AFX) - The European Central Bank is expected to leave
interest rates unchanged today, after indicating inflation remains too
high for an immediate cut in interest rates to be possible, economists
said.
The ECB's concern about inflation, signalled clearly at a hawkish
news conference from president Wim Duisenberg earlier this month, means
it may not cut interest rates until June at the earliest, the
economists added.
In a poll of 33 economists carried out last week by AFX News and
Agence France-Presse, 30 said they expect no change in rates at
Thursday's meeting. A clear majority said the ECB will hold back until
June before cutting interest rates.
Economists said the main concern for the ECB is that inflation
shows no sign of easing towards its stability ceiling of 2.0 pct until
June at the earliest, after March HICP figures showed euro zone
inflation stuck at 2.6 pct year on year.
Holger Fahrinkrug, economist at UBS Warburg said only from June can
"meaningful relief" be expected on the inflation front. "Taking the ECB
at its word suggests that this is the earliest month to provide a
justification for a rate cut."
"The ECB will maintain its wait and see policy until we see
inflation coming down to 2 pct", said Denis Errica at Banca
Internazionale di Gestione.
Economists said of particular concern to the ECB is the rise in the
core component of inflation and especially the recent unprocessed food
price rises brought on by the BSE and foot and mouth disease crises.
"We still predict a rate cut in the second quarter, but the whole
process is being thwarted by food price rises", said Rob van der
Wijngaert, economist at ABN Amro.
In its recent April monthly bulletin, the ECB warned further price
pressures from the farm crises cannot be ruled out, meaning that the
moderation of HICP inflation towards 2.0 pct may be "delayed."
Italian cities April CPI figures this week indicated that inflation
still shows little sign of abating, rising 0.4 pct from March.
Preliminary German CPI figures from the major states have also shown
strong rises from last month, with Bavaria reporting a 2.8 pct rise
year on year.
Economists said the ECB also remains upbeat on prospects for growth
in the euro zone this year, with Duisenberg insisting that the economy
will grow at or above the trend growth level of 2 pct to 2.5 pct.
"As long as it (the ECB) believes that range will not be undershot,
it will see no need to provide monetary stimulus, especially while
fiscal policy is not loosening", said UBS Warburg's Fahrinkrug.
At the EU finance ministers meeting in Malmo over the weekend,
Duisenberg said the ECB remains sure of "weathering the storm" that is
hitting the world economy this year.
However U.S. Treasury Secretary Paul O'Neill said he was
"mystified" by Europe's confidence it could escape the worst effects of
the economic slowdown this year.
"There appear to be some misconceptions on the U.S. side",
Duisenberg was reported as replying.
While the ECB maintains its hawkish stance on inflation, economists
see little hope of sustained pressure from euro zone politicians or
other world policy makers having any effect on its monetary policy.
At the summit in Malmo, Austrian Finance Minister Karl Heinz
Grasser called explicitly on the ECB to cut rates, while IMF managing
director Horst Koehler has urged the ECB twice publicly to relax its
monetary policy.
"The politicians have a primary objective and that is to be
re-elected and their comments do not influence the ECB", Guillaume
Menuet at 4Cast said. "Privately however the politicians will exchange
views", he added.
Spain's Finance Minister Rodrigo Rato signalled some finance
ministers are prepared to toe the ECB's line, denying a comment by
Grasser that a majority want a cut in interest rates.
Although all economists in the AFX/AFP poll are betting on a rate
cut of at least 25 basis points this year, some have said there is an
increasingly real risk scenario emerging that the ECB will keep rates
on hold for the entire year.
Anja Hochberg at Credit Suisse said according to her forecasts
inflation will end the year at 2.3 pct, stubbornly above the key
stability ceiling. "The probability of a rate cut this year has fallen,
but the likelihood remains over 50 pct", she said.
"So what is the possibility of no rate move at all? Well, there is
a chance", said Kelly Tonkin at Lehman Brothers. "Historically these
are not high levels of interest rates, although we do see a largely
symbolic move", he added.
Some economists also believe the ECB has missed a window of
opportunity to cut rates that will not reopen for some time to come.
Eckhard Schulte at Dresdner Kleinwort Wasserstein said the ECB's
next opportunity to move will not be until June. "The level of interest
rates is simply too high ... inflation has been determined mainly by
special effects."
The president of Germany's Ifo research institute, Hans Werner
Sinn, said last week that deflation, rather than inflation, could prove
to be the main long-term threat to the German economy, as prices fall
uncomfortably quickly from their current highs.
Schulte said this could box the ECB into an uncomfortable corner
after warning of inflation risks for so long.
"In a year's time we could have a completely different debate --
this time about deflation. It would be a very difficult debate for the
ECB to communicate", he said.
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