Strong euro rules out rise in interest rates

JITTERY stock markets and a strong euro rule out a rise in European Central Bank interest rates next week, economists said in a Reuters poll, and an increasing number say rates could stay on hold until next year.

The poll, taken July 22 to 24, showed 48 out of 51 economists expect the ECB to leave its benchmark repo rate unchanged at 3.25% for the ninth month running when it meets on August 1.

Two economists were undecided and one forecast a quarter point cut.

"With equities headed south, the euro headed north and the euro zone economy moving broadly sideways, the ECB has no reason to raise interest rates," said Adam Chester at Halifax in London.

"We have pencilled in a rate rise in November, on the assumption that growth starts to pick up again later this year. If the euro continues to recover, however, a rise in interest rates could be postponed until well into next year."

The euro , which has racked up gains of around 11% to regain parity against the dollar this year, was trading at $0.9896 at 0920 GMT on Wednesday.

Asked when rates would next change if the ECB did not move in August, five economists said September, 12 said October, 14 said November, one said December and one said the fourth quarter of this year.

Fourteen saw a move in the first half of 2003, one saw a change after 2003 and three did not answer the question.

When Reuters last polled ECB watchers in late June, six out of the 57 economists said the bank would raise rates in August and 30 said September.

The euro's recent rise is seen helping keep inflation in check by making imported goods less expensive in single currency terms.

Euro zone consumer prices rose 1.8% in June from a year earlier which left the headline rate of inflation below the ECB's self-imposed two percent ceiling.

"The strengthening of the euro is probably enough tightening of monetary conditions for the time being and I do not expect the ECB to start neutralising its rates until early next year," said Erkka Wennonen at OKO bank in Helsinki.

In the last Reuters poll Michael Schubert at Commerzbank in Frankfurt predicted an ECB rate rise in September, but he has now moved that back to November.

"We are still expecting a first rate hike before the end of the year, since we are assuming that the increase in economic momentum generally expected for the second half will be borne out as of the autumn by sufficient hard facts," he said.

The dollar's plunge against the euro, coupled with gloom on world stock markets, have raised doubts about the strength of the global economic recovery.

But ECB chief economist Otmar Issing told Reuters late on Monday that the bank remained in a wait-and-see stance on interest rates and still expected the euro zone economy to pick up speed this year despite recent stock market falls.