January 29, 2009 / 12:27 PM / 11 years ago

ECB to hold rates in February but cut them in March

LONDON (Reuters) - The European Central Bank is widely expected to take a break in its rate cutting cycle in February, but be back in action in March as both growth and inflation slide to new lows, a Reuters poll showed.

ECB President Jean-Claude Trichet left economists in little doubt the bank would pause next month when he reiterated his remark from the January press conference in Davos on Wednesday that the bank’s next important meeting will be in March.

Eighty-two of 85 economists in a poll taken January 27-29 said the ECB would leave rates on hold at a low of 2.0 percent when it meets on February 5, with three not taking Trichet’s hint and forecasting a cut.

But a fall in inflation well below the ECB’s ceiling of just below 2 percent last month, weak growth prospects, and policymaker comments as to the future path of interest rates were enough to convince 82 of 85 that the bank will cut in March.

Two said rates would be left on hold at 2.0 percent where they are currently and one economist said there would be a cut in February but no further move.

The majority said the bank will cut rates by 50 basis points in March to a historic low of 1.5 percent. And despite ECB warnings that rates are not likely to fall too much further, medians showed rates bottoming at 1.0 percent in the second quarter, compared with the third quarter in a poll on January 21.

“President Trichet’s rhetoric at the January press conference left little doubt that the ECB is keen to pause,” said Kenneth Broux, economist at Lloyds.

“The reprieve will be temporary and a rate cut to 1.50 percent is on the cards in March as the ECB catches up with the bleak growth and benign inflation outlook in its updated staff projections,” he added.

Forecasts contrast with those in a separate poll before the Bank of England’s meeting next week, which show consensus for another 50 basis point cut.

A recent stabilisation, albeit at very low levels, in a number of economic indicators including Germany’s Ifo index and the euro zone PMI indices may convince some at the ECB that the worst of recession has passed.

The central bank has already slashed rates by 225 basis points since October and while some policymakers have acknowledged rates could fall further it does not seem likely they will follow the path of the U.S. Federal Reserve and fall close to zero.

ECB Executive Board member Lorenzo Bini Smaghi said on Tuesday that a zero interest rate policy would not fix the problems in the financial sector, giving the United States as an example.

The survey showed a median 20 percent chance that the ECB would take rates down to zero. Still, only one economist said it would do that.

The ECB’s task will be made even easier should inflation fall to 1.4 percent in January as economists expect when data are released on Friday. If they are correct, that would be the lowest inflation rate since late 1999.

A contraction of two percent in euro zone economic growth this year forecast by the International Monetary Fund will add to the argument too.

Markus Marterbauer at Austrian research institute WIFO was one of the three economists in the Reuters poll looking for an ECB cut on February 5.

“Real economic data point heavily downwards, so that is an argument for them to cut rates, especially when you look too at inflation data, which should come below 1.0 percent in the first few months of the year,” he said.

“From the fundamental framework cuts are due. OK, Trichet’s statement is pointing against this argument, but whatever.”

Polling by Bangalore Polling Unit; Editing by Ruth Pitchford

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