ECB May Get Lonely

The European Central Bank will, once again, do nothing. But that stance is starting to make members governing council feel awkward.

Across developed countries, central banks have been talking about monetary easing and cutting rates to avert the dangers of a spillover to the wider economies from a credit crunch which is far from reaching the end.

The Bank of Canada cut rates by 25 basis points Tuesday to 4.24 percent, citing the uncertainty brought by the financial markets turmoil.

The Bank of England may follow suit soon enough, since house prices in London have finally begun to fall from their dizzying highs.

But with growth and inflation movingsideways in the euro zone, the ECB is widely expected to leave its main refinancing rate unchanged at 4 percent on Thursday, the fourth time since it signaled a rise for September. In a Reuters poll of 72 analysts, all predicted that the ECB will stand pat.

"I don't think they have a lot of options, they will keep the rate unchanged," Veronika Lammer, a euro-zone analyst with Erste Bank in Vienna, told

New Growth, Inflation Forecasts

The ECB will also release new projections for growth and inflation, and analysts expect the bank to revise inflation forecasts upwards after November's 3 percent spike. Growth is expected to be revised downwards.

Economists at ING Bank predict that the new ECB staff projections for inflation for next year are likely to be raised to 2.2 percent or 2.3 percent from the current 2 percent, while real gross domestic product growth will probably be revised to 2 percent from 2.3 percent.


"Growth was strong in the third quarter in Europe, but export orders are slowing down. Exporters see that volumes are affected by the strong euro," Martin van Vliet, euro-zone analyst at ING Bank in Amsterdam, told

"If they cut the growth projection to 2 percent and still say the risks are on the downside, the most likely path would be easing," van Vliet said. "The chance of a cut is higher than the chance of a hike."

Recent noises from euro-zone officials seem to strengthen this point.

"I am more concerned with the slowdown in our economies," Portuguese Finance Minister Fernando Teixeira dos Santos, whose country currently holds the rotating presidency of the EU, told a financial seminar in Brussels on Monday.

Inflation Fears

European Union Monetary Affairs Commissioner Joaquin Almunia also said that growth was at risk because credit was not as easily available.

"Tighter credit conditions imply fewer borrowing opportunities," he said. "This, in turn, has raised the prospect of slower economic growth in the coming years."

The worries on growth are not enough to force the ECB to cut rates, since, with oil and food prices at high levels, it is unclear how long inflation will continue to be above the bank's comfort zone of 2 percent.

Besides, unemployment in the euro-zone hit a record low of 7.2 percent in October, data from Eurostat showed, sparking fears that wage-driven inflation may follow.

Factory output growth also increased in November after hitting a 26-month low in October, with the final PMI at 52.8, above the 52.6 market consensus forecast.

And business sentiment in Germany and France was higher than expected, with the German Ifo business climate index rising to 104.2 in November from October's 103.9.

But, while the Ifo survey includes responses from companies in the manufacturing, construction and retail sectors, it excludesthe financial services sector and its reading may not give a complete picture of the euro-zone business sentiment.

Strong Euro Curse

The data might, therefore, not paint the rosy picture hawks in the ECB may want to see. Exporters' woes deepened last month as the euro hit a new record high against the dollar and even the envy of them all, the Germans, have started to grumble.

An intervention level to curb the euro's rise is difficult to predict, economists say. The exchange rate's "pain threshold" is different for European companies, a survey by employers’ lobby Business Europe showed recently.

For German businesses, the level at which the euro's rise against the dollar would cause pain is $1.50, and it was nearly reached on November 23 when the euro hit an all-time high of $1.49.

French and Italianexporters are beyond their thresholds of$1.20 and $1.30 respectively.

"It obviously depends on developments on price competitiveness," said van Vliet, adding that Germany’s higher productivity and slower wage rises have helped it cope with the euro's rise.

But on Tuesday, Germany’s Finance Minister Peer Steinbrueck, who said not long ago that his country "loved" a strong euro, said: "At the moment we have a disorderly adjustment and unwinding" of the exchange rate.

After European Central Bank President Jean-Claude Trichet characterized the exchange rates moves as "brutal," Steinbrueck’s remarks strengthen the case for intervention, if the speed of the euro appreciation increases.