FRANKFURT, May 8 - A soaring currency and grim economic data fuelled speculation on Thursday that the European Central Bank would surprise with an interest rate cut, even though the central bankers have given no such signal. Instead ECB policymakers have said that already-low interest rates favour a pickup in growth later this year and they want more evidence that price pressures are receding. Members of the ECB council declined to make any comments on the outlook for rates as they entered the ECB headquarters for the meeting.
Ahead of the ECB's interest-rate decision at 1145 GMT, the Bank of England will release its decision at 1100 GMT, which markets see as a close call for a rate cut. 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. The Fed warning added to jitters over the ECB. While most analysts expect no change in the benchmark 2.50 percent official rates, they are getting less convinced and short-term euro zone interest rate futures signalled an increase in chances the ECB will deliver a rate cut later on Thursday. Until this week, markets had all but ruled out any change in the ECB's benchmark rate of 2.50 percent and were expecting a cut in June. But money markets are showing increasing prospects for a cut based on negative economic data and the strength of the euro , which is nudging four-year highs against the dollar.
ECB policymakers also have on their agenda on Thursday monetary policy strategy. No major changes are expected, and an announcement could come as early as Thursday or by the end of the month. Fresh signs of economic weakness came with a shocking 3.9 percent plunge in German industrial orders for March and a jump in German jobless rate in April. Throughout the euro zone, manufacturing and service sectors are in recession and business sentiment weak. Despite such data, 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.
MATTER OF TIME
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. Most economists in a poll last week said the bank would leave its benchmark refinancing rate flat at 2.50 percent and instead move in June. But an increasing number of analysts by Thursday were raising the chances for a surprise cut. June Euribor interest rate futures , a gauge of rate expectations, were pricing for official rates at 2.32 percent or roughly a 70 percent chance of a quarter point cut by June. The two-year Schatz yield slipped to 2.291 percent, two basis points down from Wednesday's close. Traders took profits on the euro ahead of a possible rate cut, pushing the currency down to $1.1320 against the dollar early Thursday from May 6 high of $1.1453. "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 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 note. But the ECB has never reacted quickly to currency moves, arguing they may reverse quickly.//