ECB to mull interest rate decision, signals no cut in interest rates

ECB May Leave Rate at Six-Year High to Assess Credit, Euro
By Gabi Thesing

Oct. 4 (Bloomberg) -- The European Central Bank will probably keep interest rates at a six-year high as it gauges the impact of the U.S. subprime-mortgage collapse and the rising euro, a survey of economists shows.

Policy makers meeting in Vienna today will leave the benchmark refinancing rate at 4 percent, according to all but one of the 55 economists surveyed by Bloomberg News. The bank will wait until April before raising its benchmark rate to 4.25 percent, a separate survey shows.

Rising credit costs prompted the ECB to shelve a planned a rate increase last month, and the euro's climb to a record against the dollar has clouded the outlook for economic growth. Policy makers also are concerned inflation will accelerate: Last month, consumer-price increases breached the ECB's 2 percent ceiling for the first time in more than a year.

The ECB ``wants to let the turbulence work its way through the system and see how it affects the economy,'' said Elga Bartsch, an economist at Morgan Stanley in London.

The central bank will announce its decision at 1:45 p.m. and President Jean-Claude Trichet is scheduled to hold a press conference 45 minutes later. The Bank of England will leave its benchmark rate at 5.75 percent, a Bloomberg News survey shows. That decision is due at noon in London.

Politicians Concerned
Europe's economy is already showing signs of slowing. Service industries from insurers to airlines grew at the weakest pace in two years in September and confidence among consumers and executives in the economic outlook dropped to a 16-month low.

Italian Prime Minister Romano Prodi and his Luxembourg counterpart, Jean-Claude Juncker, said this week they are concerned about the appreciation of the euro, which rose to a record $1.4283 on Oct. 1. Belgian Finance Minister Didier Reynders said in an interview with Les Echos published yesterday that the ECB should consider cutting rates if economic growth slows.

The currency has risen 6 percent against the dollar in the past six weeks. The rally was fueled further by the U.S. Federal Reserve's decision on Sept. 18 to lower its benchmark rate by a half point to 4.75 percent to prevent the U.S. from sinking into a recession following the slump in housing.

Rising defaults on U.S. mortgages aimed at people with a poor credit history increased borrowing costs for households and companies in Europe. While the ECB has held seven special money auctions since markets seized up on Aug. 9, the rate for three- month funds was at a six-year high of 4.8 percent Oct. 2.

ECB Splits
Signs of discord have emerged among ECB policy makers. Greece's Nicholas Garganas said in a Sept. 24 interview the stronger euro won't damp domestic inflation, three days after his Portuguese colleague Vitor Constancio said the currency's move will ease pricing pressures.
Trichet said in a Sept. 27 interview with the Netherlands' NOS television network that ``uncertainties have augmented.''

The current outlook for growth ``is leading to a more controversial debate on the governing council,'' said Bartsch of Morgan Stanley. ``But that's a good thing.''

For now, ECB policy makers are signaling they're in no hurry to follow the Fed's example and cut rates. Trichet said Oct. 1 the ``euro area has become more resilient to external developments'' and Vice President Lucas Papademos said last week the impact on growth from market turbulence will be limited.

Inflation accelerated to 2.1 percent in September from 1.7 percent a month earlier, and unemployment is at a record low.

Oil prices around $80 a barrel and an increase in lending to companies and consumers will add to the ECB's inflation concerns. Loans to the private sector rose 11.2 percent in August from a year earlier, up from 11 percent the previous month, the bank said Sept. 27. That's the highest since November 2006.

``If markets are hoping for some signal about possible rate cuts, they are likely to be disappointed,'' said Dario Perkins, an economist at ABN Amro Holding NV in London.