The European Central Bank will wait until the first quarter of next year before cutting rates, slightly earlier than thought before, despite signs pointing to an economy already at a virtual standstill.
All 83 economists polled between August 22-27 said the ECB would leave rates at 4.25 percent when it meets on September 4 after it raised them in July for the first time in over a year as part of a battle against inflation. The poll shows rates on hold until the first quarter of next year, by which time inflation is expected to be more under control and will give the bank room to manoeuvre.
That is a very close call however, with just over half, 43 of 82 analysts saying the ECB would cut rates at least once by the end of March. A Reuters poll published last week saw the bank next cutting rates in the second quarter.
High inflation, which at four percent in July was double the ECB's two percent target ceiling, still leaves little room for action to help the 15-nation bloc's economy that shrank in the second quarter for the first time since monetary union.
Economists gave a median 20 percent chance of a cut by year- end, unchanged from the forecast in last month's poll, and a 70 percent likelihood that rates would remain level this year.
"Striking the right balance between growth risks on the one hand, and inflationary risks on the other remains a tricky operation for the ECB. For this reason it is likely to keep rates on hold at 4.25 percent for the foreseeable future," said Claudia Broyer at Dresdner Bank. Inflation has been boosted by soaring energy, food and commodity prices but the cost of oil has dropped around 20 percent from record highs set in July and some economists believe further falls will ease the weight on the ECB's mind.
But it is clearly still worried. "Our central task is price stability, to maintain price stability to guarantee price stability," outgoing Austrian Governing Council member Klaus Liebscher said last week.
Fellow council member Axel Weber was quoted as saying earlier on Wednesday that talk about interest rate cuts was "premature". Slowing growth will also have a dampening effect on inflation as economies across the world continue to be hit by a credit crisis that began just over a year ago with problems in the United States mortgage market.
Whether it's enough to drag down inflation significantly next year is a close call - and the staff projections produced for the September meeting will be key. Twenty-seven of 67 economists said the bank would revise down its inflation expectations for 2009, paving the way for interest rate cuts next year.
However, 27 of them also said the bank would leave 2009 forecasts unchanged from its June projection of 1.8 to 3.0 percent. The remainder said the projection would be higher.
Growth forecasts were less optimistic, with 63 of 67 saying forecasts would be revised down from June's one to two percent predictions for 2009, providing more room for the bank to act. A Reuters poll last week showed economists predicting the euro zone economy would grow 1.4 percent in 2008, and just 1.0 percent in 2009, down from the 2.6 percent seen in 2007.
Median forecasts in the poll published on Wednesday saw rates on hold until the first quarter when they would fall to 4.0 percent, sooner than previously expected, and then fall again in the third quarter to 3.75 percent. Markets have also priced in a cut and the euro has sunk to a six-month low against the dollar as the United States Federal Reserve's next move is expected to be to move rates up.