ECB expected to buy for time on rates

The European Central Bank is expected to leave rates on hold at 4.0 per cent Thursday in the face of renewed inflationary prices and fading economic growth. ( dpa )

But many analysts believe that the ECB will be forced to cut rates to 3.5 per cent by the end of the year in a bid to shore up economic confidence in the face of fears of a global slump triggered by the US housing market crisis.

Financial markets are expecting even deeper rate cuts with the ECB following the lead of the world's other major central banks, notably the US Federal Reserve, which has launched a series of bold steps towards slashing the cost of money in the world's biggest economy.

Eurozone interest rates have been on hold since June last year with the ECB forced to abandon plans to raise borrowing costs in September in the face of the global financial market turmoil unleashed by the upheaval in the American mortgage sector.

In the meantime, the euro's recent surge to an all-time high of more than 1.52 dollars has helped to give the ECB's 21-head rate-setting council some room to manoeuvre on rates with the currency's strength resulting in tighter monetary conditions in the eurozone.

But with annual inflation in the 15-member eurozone remaining stuck at 3.2 per cent in February, well above the ECB's 2.0 per cent target and the highest since the euro's launch in 1999, the Frankfurt-based bank is unlikely to move quickly to flag plans to begin trimming borrowing costs.

"It is difficult to see the ECB preparing for a rate cut soon," said Rainer Guntermann, senior economist with the Dresdner Kleinwort.

However, European finance ministers joined business leaders this week in expressing concern about the strength of the common currency amid worries that it could undercut the currency bloc's key export machine.

As a result, ECB chief Jean-Claude Trichet's press conference Thursday is likely to be closely watched by markets for hints as to how the bank's governing council is sizing both interest policy and the strength of the euro.

At his press conference, Trichet is also scheduled to release the bank's latest so-called staff projections on the inflation-and-growth outlook for the eurozone.

Aside from winding back economic growth forecasts for the eurozone, the staff projections are expected to point to inflation in the currency bloc coming in at above 2.0 per cent both this year and in 2009.

As part of the buildup to Thursday's ECB meeting, key data and surveys have been pointing to the eurozone growth rate slipping back a gear but with the currency bloc's economy avoiding a sharp contraction as a result of the slowing world economy.

Consequently, this is also expected to help the ECB to buy for time on interest rates.

The European Commission expects the eurozone economy to loose momentum this year and to grow by 1.8 per cent compared to 2.7 per cent in 2007.

"The bit question is what the staff projections will tell us about (the ECB's) monetary bias," said Klaus Baader, Merrill Lynch's London-based chief European economist.

Thursday's meeting of the ECB's governing council will also coincide with a decision by the Bank of England on borrowing costs.

But with the London-based central bank having delivered a series of rate cuts in recent months including a 25-basis points reduction in February, analysts are expecting the British monetary authorities to leave rates on hold at 5.25 per cent.

However, since cutting rates last month, the London-based monetary authorities' forecasts have pointed to higher energy and food costs resulting in inflation edging up above 3.0 per cent this year from 2.2 per cent in January. The UK central bank also has a 2.0-per-cent inflation target.

In addition, British interest rates are much more restrictive than those currently prevailing in the eurozone, which adds to the dilemma facing the Bank of England as it attempts to balance out the threats posed by falling growth and high inflation.

But unlike the ECB, the Bank of England's problems of dealing with rising consumer prices are being exacerbated by a weak pound which is helping to fuel inflationary pressures in Britain.

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