ECB rate on hold, lower growth forecast on tap

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FRANKFURT, Sept 3 (AFP) The European Central Bank (ECB) is expected to leave its key interest rate on hold at 4.25 per cent Thursday, but it will likely cut its forecasts for economic growth, analysts say. brBank of America senior economist Holger Schmieding said he saw rates staying the same but we expect the ECB to cut its 2008 and 2009 growth forecasts substantially. brThe midpoint of forecast ranges should fall to around 1.4 per cent this year from 1.8 per cent previously, and to 1.1 per cent from 1.5 per cent for 2009, he added. brThe Organisation for Economic Cooperation and Development (OECD) revised its forecast lower Tuesday, saying the Eurozone economy would expand by 1.3 per cent this year. brThe economy of the 15-nation Eurozone contracted by 0.2 per cent in the second quarter, the first decrease since the euro was launched in 1999. brMany economists have pointed up the threat of a recession, as defined by two successive quarters of contraction, but the head of Eurozone finance ministers, Luxembourg's Finance Minister Jean-Claude Juncker, has downplayed the risk. brI don't see a risk of a real recession in Europe, Juncker said Monday. brOn the inflation front, estimates should change only slightly, Schmieding said, from 3.4 per cent previously, to 3.5 or 3.6 per cent this year. brAnalysts saw little chance of Eurozone interest rates falling this year even though the economy was slowing, because inflation was well above the ECB target of just below 2.0 per cent. brThe central bank doesn't want the market to start pricing in rate cuts, said UniCredit Markets chief economist Aurelio Maccario. brSlower growth did not necessarily mean lower inflation, he noted, though the consumer price index did ease to 3.8 per cent last month. brThe ECB's commitment to maintaining stable prices, despite growth momentum coming virtually to a halt would rule out a serious rate cut discussion this year, Maccario said. brThat means ECB policymakers would turn a deaf ear to renewed calls for the central bank to shift its focus from the primary goal of keeping inflation in check to helping growth. brThe bank raised interest rates in July to fight inflation despite the threat of slowing growth. brThe move helped to maintain the single European currency's strength against other currencies, which is crimping exports from the zone and causing concern in many countries. brOn Monday, French Finance Minister Christine Lagarde told LCI television that in light of the macroeconomic situation of member states, the ECB has a role to play in the euro's appreciation against the dollar, yuan and yen. brMeanwhile, a leading Eurozone purchasing managers index picked up slightly last month, a bright light among otherwise dismal indicators. brDespite the blip, OECD economist Jorgen Elmeskovm said that in the euro area and its three largest economies (Germany, France and Italy), as well as in the United Kingdom, activity is foreseen to remain broadly flat this year. brOil prices have fallen rapidly in recent weeks, reducing inflationary pressures, but ECB policymakers are expected to keep close eye on demands for strong wage increase that could create a second-round of inflation. brGerman trade union IG Metall's demand for a wage increase of up to eight per cent will probably reinforce what seems to be the dominant view at the ECB The Eurozone needs a period of rather soft economic growth and unemployment to put a lid on wage inflation, Schmieding said. brFinally, Investec analyst David Page looked for the ECB to unveil changes to the kinds of collateral it accepts during refinancing operations, after governing council member Yves Mersch was quoted as saying that some banks were gaming the system.