ECB Will Probably Keep Rate at 4% on Inflation Fears

ECB Will Probably Keep Rate at 4% on Inflation Fears

Feb. 4 (Bloomberg) -- The European Central Bank will probably keep interest rates at a six-year high as it deems accelerating inflation a greater concern than slowing economic growth, a survey of economists shows.

The Frankfurt-based bank will keep the benchmark refinancing rate at 4 percent when policy makers convene on Feb. 7, all 55 economists surveyed by Bloomberg News forecast.

``The economic environment simply doesn't call for an early rate cut,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. ``Manufacturing activity hasn't had a bad start to the year, and with high inflation, the ECB won't capitulate on its outlook yet.''

Inflation in the 15 nations sharing the euro accelerated to a 14-year high in January, overshooting the bank's 2 percent limit for a fifth month. Even so, investors are betting ECB policy makers will be forced to follow their counterparts in the U.S. later this year and lower rates.

A plunge in stock prices in the first three weeks of January and tighter credit conditions worldwide prompted the Federal Reserve on Jan. 22 to lower the benchmark rate by three- quarters of a point in an emergency move, its biggest in two decades. U.S. policy makers followed up Jan. 30 with a half- point cut to 3 percent and cited a ``softening in labor markets.''

The U.S. unexpectedly lost jobs for the first time in more than four years in January, raising the odds that the world's largest economy will contract. In Europe, confidence among executives and consumers fell more than economists had forecast.

IMF Forecast Cut

The International Monetary Fund last week cut its euro- region growth estimate by half a point to 1.6 percent, saying the turmoil in financial markets has spread to the rest of the economy. The Washington-based lender expects the global economy to expand 4.1 percent this year, below the 4.4 percent pace projected in October.

The implied rate on the Euribor interest-rate futures contract for December was 3.59 percent on Feb. 1, down from 4.36 percent a month ago, suggesting investors are betting on at least two rate reductions by the ECB this year.

Policy makers won't be led ``on what the markets expect,'' Council member Nicholas Garganas said in an interview last week. ``I'm very concerned about the high inflation rate,'' he said. ECB President Jean-Claude Trichet has said the bank may still have to raise interest rates should workers' pay demands threaten to unleash a wage-price spiral.

Train, tram and bus drivers in Berlin went on strike last week, demanding 8 percent more pay to compensate for rising food and energy prices. Nurses in Finland won wage increases of as much as 28 percent over four years in December.

Above Limit

Inflation in the 15 countries sharing the euro accelerated to 3.2 percent in January. The ECB predicted in December that price gains will average about 2.5 percent this year after 2.1 percent in 2007. That would make 2008 the ninth successive year the bank failed to achieve its goal of keeping inflation just below 2 percent.

There are signs that the region's economy may be weathering the slowdown in the U.S. Unemployment is declining and manufacturing expanded more than initially estimated in January. In Germany, the region's largest economy, business confidence unexpectedly rose last month.

Juergen Hambrecht, chief executive officer of BASF AG, the world's largest chemical maker, said on Jan. 28 that even if the U.S. sneezes, ``that doesn't mean the whole world will catch a cold.''

ECB council member Michael Bonello from Malta said last week that any slowdown is ``coming from pretty high levels, so it's not as if this is a doomsday scenario.''

Economic data has been too volatile to speculate on the future course of rates in the euro region, Bonello said. ``Things are changing day to day.''

BLOOMBERG