ECB to delay interest rate cut to June

THE European Central Bank will delay lowering interest rates until June as it seeks more evidence on the effects of the Iraq war on the world’s second-largest economic region, according to a survey of economists.

All but two of 25 economists surveyed by Bloomberg News said the bank won’t cut rates in May. Twenty-one expect a reduction of at least a quarter point in June. In a survey conducted April 4, most had forecast a May rate reduction.

“The war ended soon enough for the ECB to wait and see what the impact is on the economy,” said Luigi Buttiglione, head of European economics at Barclays Capital Plc and a former economist at Italy’s central bank, who expects a half-point cut in June.

If there’s no rebound, the ECB “will be forced to cut rates again”, he said.

The European Commission, the International Monetary Fund and the Organisation for Economic Development and Co-operation have suggested the bank has room to pare borrowing costs further.

ECB policy makers from its president, Wim Duisenberg, to France’s Jean-Claude Trichet said last weekend an economic recovery has become more likely, indicating they’re in no hurry to lower rates.

The ECB last cut rates to 2.5% on March 6. Another reduction by a quarter point would take borrowing costs to the lowest level in any euro country since at least 1948.

“Compared with our last assessment, there is no real new evidence that would allow us to see more clearly at this point,” ECB council member Yves Mersch said in an interview this week.

“Although this picture should brighten up from day to day.”

Investors have scaled back expectations for cheaper money in recent days, interest futures trading shows.

The yield on a three-month euro deposit maturing in June was at 2.47% at the close on Thursday, up from 2.35% a week before.

The region’s €6.5 trillion economy, second in size only to the US, grew at the slowest pace in almost a decade last year and may contract this quarter, the EU has said.

The ECB has cut rates six times since the start of 2001, half as often as the US. Federal Reserve.

Unlike the Fed, which must try to achieve a maximum amount of employment as well as stable prices, the ECB’s primary task is to combat inflation.