The chances of a euro zone interest rate cut this year are steadily fading as high inflation is expected to force the European Central Bank to leave them on hold, a Reuters poll showed. A majority of economists still see one interest rate cut from the ECB in the fourth quarter, but they are losing conviction behind that already modest call.
All 82 economists in the poll, carried out May 26-28, saw the ECB leaving rates on hold for the 12th month in a row at 4.0 percent at the banks' next policy meeting on Thursday June 5. They gave a 60 percent chance the ECB would cut rates by a quarter point to 3.75 percent by the end of the year, down from the 70 percent chance in an April 30 poll and 75 percent at the start of that month.
That marks a sharp shift from last month when the ECB was forecast to cut rates twice by year-end, and stands in contrast to financial markets which price in a rate rise by year-end. Only 19 of 82 see a cut by the end of September, less than half the 44 of 82 who saw such a cut in a poll one month ago.
Uncomfortably high inflation, thanks to a surge in oil prices, has forced many economists to change their call. That is despite mounting evidence of a steady slowdown to come, which they say will eventually force the ECB to react to by cutting rates.
"The ECB needs to balance out weakening growth and still elevated inflation, which for a while will mean unchanged interest rates," said Silvia Pepino at J.P. Morgan Chase, who now forecasts rates on hold at 4.0 percent until the end of 2009. ECB Governing Council member Axel Weber told Reuters on Tuesday that he ruled out a rate cut in 2008 as long as there are medium-term dangers for price stability. He even warned that a hike may be needed.
Inflation is forecast to rise in May to 3.5 percent or even higher when data is released on Friday, way above the ECB's 2.0 percent ceiling. Strong inflation numbers from most German states on Wednesday support the likelihood of a rise in inflation this month. See. Many economists said such evidence would persuade the ECB to upgrade its calls for inflation when it updates its staff forecasts next week.
In March the bank predicted inflation of around 2.9 percent this year, easing to 2.1 percent in 2009. Since then oil prices have jumped to over $130 a barrel from around $100, before retreating, while food prices have moved sharply higher.
But economic indicators are painting a bleaker picture of the economy in coming months and leaving some economists holding out for cuts right now. "By 2009 the focus may not shift from inflation, but it may widen to encompass the fact that high oil prices are not only a risk to inflation, but they are also a risk to growth," said Stuart Bennett at Calyon.