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ECB set to cut rates as spotlight falls on forecasts

Published 12/03/2008, 07:00 PM
Updated 12/03/2008, 07:02 PM
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By Marc Jones

FRANKFURT, Dec 4 (Reuters) - The European Central Bank is expected to cut interest rates to at least a two year low on Thursday armed with a new set of in-house forecasts likely to confirm that the euro zone economy is in serious trouble.

Opinions on how big the rate cut will be are still split, with economists divided over whether the ECB will stick to a tried-and-tested 50 basis point cut or go for a record 75 basis points.

Two-thirds of analysts in a Reuters poll [ECB/INT] see a 50 basis points cut which would take rates to a 2.75 percent -- a two year low -- but 24 of the 81 economists polled think policymakers will go for a 75, or even 100 basis point cut.

This month's ECB meeting will take place in Brussels, one of the bank's two away-days from its Frankfurt home and comes at a crucial time.

The financial crisis is beginning to inflict major damage on the euro zone and Europe's governments are in the middle of hammering out how much money they will pump into their recession hit economies.

The meeting will start at 0800 GMT, the rate decision will be announced at 1245 GMT and bank President Jean-Claude Trichet will hold a news conference at 1330 GMT where he will explain the decision, give details of new staff economic forecasts and take questions.

The 15-nation bloc was officially declared in recession last month following a second quarterly contraction in economic output and analysts don't see the economy growing again until the third quarter of next year -- and then only marginally. (For poll please double click on [ECILT/EU])

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The latest batch of data has also been dire. Retail sales and producer prices plummeted in October as economic sentiment, manufacturing and services activity all slumped alongside rising unemployment, with the region's dominant services sector PMI figures falling to its lowest level in the survey's 10 year history.

With the alarm bells ringing politicians, economists, businesses and trade unions have all urged the ECB to cut rates but ECB members have warned it would be a mistake to cut rates too far, too fast. (For story please double click on [ID:nLP73740])

FORECASTS

Despite the careful words from policymakers, interest rate traders, who often bet on more aggressive cuts, are fully pricing in a cut of 75 basis points according to EONIA interest rate contracts.

But some analysts think that the new set of ECB staff forecasts, which for the first time will stretch into 2010, will be enough to sway the more cautious at the ECB.

"The Governing Council will have the benefit of a full update of its growth and inflation forecasts - that will almost certainly show sharp downward revisions," said Nick Kounis, Chief European Economist at Fortis bank.

"Members will not have to exercise caution because of a sense that they are shooting in the dark... we think that it (the ECB) is more flexible than commonly perceived and will cut rates by a record 75 basis points because the data justify at least that amount." he added.

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Analysts at Bank of America agreed arguing that with inflation expectations back in check, "monetary policy can now be bold."

The last set of ECB staff projections back in September forecast growth of between 0.6-1.8 percent and inflation between 2.3-2.9 in 2009.

Since then however the collapse of banking giant Lehman Brothers, a string of multi billion dollar government bail outs and a wave of profit warnings and job cuts from major companies have seriously rattled the economy and killed off the threat of inflation .

The International Monetary Fund and the Organisation of Economic Cooperation and Development have both said they expect the euro zone to shrink by 0.5 percent next year while economists polled by Reuters on Nov. 20 expect a 0.4 percent decline.

France's economy minister Christine Lagarde will also sit in on the meeting, something which could irritate a few of the ECB members following her recent calls for them to cut rates. (For story please click [ID:nPAB004536])

But it also comes against a backdrop of increasing central bank willingness to slash rates.

Although the ECB has lowered rates twice since early October, the U.S. Federal Reserve, the Bank of England and the Swiss National Bank have all cut by more.

The BoE is also expected to reduced British rates again on Thursday by at least 50 basis points. It's stunning 150 basis point cut last month made the ECB's 50 basis point cut look a little tame. (Reporting by Marc Jones; Editing by Ron Askew)

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