ECB to defer rates hike to Q3 of 2011

SIGNS of a slowing eurozone economy and intensifying austerity measures mean the European Central Bank will likely wait until the third quarter of 2011 to raise interest rates, a Reuters poll showed.

Some 21 of the 76 economists surveyed pushed back their predictions for an ECB rate hike, forcing the overall median forecast for the bank’s next move back a full quarter for the second month running.

Respondents said it was inconceivable the ECB could start withdrawing monetary support soon, given the new urgency for fiscal cutbacks shown by European politicians at the G20 summits, pessimistic business surveys and a still-unresolved eurozone debt crisis.

“Government bond market stresses, weak bank credit and volatile capital markets mean that the transmission of monetary stimulus into real economies is down to a trickle,” said Lena Komileva at Tullett Prebon in London.

The ECB’s main refinancing rate will likely reach 1.5% by the end of next year compared with its current 1.0%, the poll showed.

In January’s poll, before the scale of Greece’s debt woes and subsequent market turmoil became fully apparent, analysts thought rates would reach that level by the end of this year.

In March, economists gave a median 60% chance of at least one hike by the end of 2010, compared with a 10% chance now.

“With businesses and consumers focusing on deleveraging and with no support from government stimuli or bank credit, central bank rates will have to remain low for much longer,” said Komileva.

Last week’s eurozone purchasing managers indexes showed new business for private sector services in number one economy Germany barely grew at all in June and dimming confidence about the future durability of the recovery.

Before last month’s G20 summits, US Treasury Secretary Timothy Geithner said big European states had to do more to stimulate demand in their economies and warned them not to cut spending too far and too fast, echoing US president Barack Obama’s comments.

Still, Britain – outside the eurozone but no less exposed to its problems – unveiled its tightest budget in a generation two weeks ago, and German Chancellor Angela Merkel has committed to €80 billion cuts over the next four years.

While the poll showed zero chance of any interest rate move from a record low 1.0% at the July 8 ECB meeting, analysts will be listening closely for clues on how long the ECB will offer extraordinary liquidity support to banks.