Analysts bet against European rate change

12th January 2005, Comments 0 comments

12 January 2005, BERLIN - The European Central Bank is meeting on Thursday with a raft of conflicting signals about the outlook for the 12-member eurozone economy, and as a result is widely expected to keep rates on hold this week and possibly for months to come. "Rates are on hold for as far as the eye can see," said Rainer Guntermann, senior European economist with the investment house, Kleinwort Benson Wasserstein. Indeed, he sees the ECB's 18-head rate-setting council holding its refinancing rate at i

12 January 2005

BERLIN - The European Central Bank is meeting on Thursday with a raft of conflicting signals about the outlook for the 12-member eurozone economy, and as a result is  widely expected to keep rates on hold this week and possibly for months to come.

"Rates are on hold for as far as the eye can see," said Rainer Guntermann, senior European economist with the investment house, Kleinwort Benson Wasserstein.

Indeed, he sees the ECB's 18-head rate-setting council holding its refinancing rate at its current historic low of two per cent for the rest of this year and into 2006 as below-trend growth and modest inflation keep the bank from following other leading central banks and tightening monetary policy.

The ECB last changed interest rates in June 2003 when it raised the refi rate by a hefty 50 basis points.

Moreover, combined with the current uncertain picture facing the euro and evidence of the current fragile state of the eurozone economy, analysts who had been forecasting a rate hike during the first half of this year have been pushing back their timetable for a monetary change until later in the year.

And then, most of those forecasting a rate hike only expect a very modest tightening with the ECB delivering a 25 basis points increase towards the end of the year.

Only a matter of months ago, the consensus among analysts was that the ECB would follow the lead of the US Federal Reserve and the Bank of England and raise the refi rate during the first of half of 2005.

Since then, however, a surge in oil prices, a sharp escalation in the euro against the dollar and stagnating consumer demand have thrown into question previous 2005 growth forecasts and the prospects for the upswing in the currency bloc that began to take shape more than a year ago.

As a consequence, this has helped to fuel doubts about when the ECB might be able to tighten monetary policy with the bank having been forced to trim its own 2005 forecasts. After chalking up a growth rate of 1.8 percent last year, economists expect the eurozone to expand by about 1.5 percent in 2005.

At one point, the soaring euro even sparked speculation that the next monetary move by the ECB might be a rate cut so as to help ease some of the pressure on the common currency and remove the threat posed to eurozone exports.

But a tick up in eurozone inflation in December to 2.3 percent appears to have finally killed off any talk of a rate cut with the rise in consumer prices adding to the uncertain economic picture facing the ECB. This is despite forecasts that inflation should fall during the course of 2005.

Speaking in December at his last press conference for 2004, ECB chief Jean-Claude Trichet told reporters that the bank's governing council had considered a rate hike with analysts expecting the bank president to be equally hawkish when he faces journalists following Thursday's meeting, especially in the wake of the latest inflation figures.

Setting the stage for Thursday's press conference, Trichet said Monday following a meeting of G10 central bankers in Basle that he was confident about global economic expansion adding that the worst effects of high energy costs had been absorbed.

But as a reminder of the uncertainties facing the eurozone economy and the risks to growth as it starts the new year, oil prices began again to rise this week.

In addition, after losing ground to the dollar, the euro also accelerated again this week underscoring worries about exports which have been the key pillar to the currency bloc's recovery from a protracted period of stagnation.

What is more, while leading economic sentiment survey have been surprisingly upbeat about the coming months, hard economic data out of the eurozone have been far more dispiriting.

This has been highlighted by indicators released in the run up to Thursday's meeting by the eurozone's biggest economy, Germany.

While German investor confidence bounded ahead for the second consecutive month in January, key production and factory order book data came in worse than expected with the unemployment rate rising to 10.8 percent in December from 10.3 percent in November. 

DPA

Subject: German news
 

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