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ANALYSIS: ECB expected to resist pressure for interest cuts

"ECB president Jean-Claude Trichet will show more concerns about the economy ... At the same time, he will warn about the risks of inflation, as he did at the beginning of January and stress that the ECB is ready to act."

Joerg Kraemer, chief economist at Commerzbank

Faced with record inflation, the European Central Bank (ECB) is expected to resist pressure for an interest rate cut when its governing council meets this week, in the wake of moves by the US Federal Reserve.

Despite a spectacular decrease in US lending rates and growing concern over the 15-country eurozone economy, analysts say the ECB will keep its main rate at 4 percent, where it has been since June, at Thursday's meeting.

It does not feel the time has come to cut the cost of borrowing, or even to signal that a cut is in the cards -- in contrast to the Bank of England, which economists expect to ease its main rate the same day.

"ECB president Jean-Claude Trichet will show more concerns about the economy," Commerzbank chief economist Joerg Kraemer said.

But that would be it.

"At the same time, he will warn about the risks of inflation, as he did at the beginning of January and stress that the ECB is ready to act" to counter them, a way of threatening tighter monetary conditions, Kraemer said.

Eurozone inflation hit 3.2 percent last month, fueling concern at the loss of purchasing power in Europe. Trade unions, especially in Germany, see it as a good reason to press for significantly higher wages.

But the ECB, which considers inflation to be under control if it remains just below 2 percent, is worried that stiff pay increases will create long-term inflation.

Given its primary mission of guaranteeing price stability, the bank is likely to reiterate its warnings, said Holger Sandte of WestLB bank.

But words seem to be the only weapon at its disposal. Raising rates would be nearly impossible as the US flirts with recession and the eurozone begins to pay the price.

Recent drops in business and consumer sentiment are an unmistakable sign of the times.

If the ECB holds firm, it will undoubtedly be the target of more pressure, in particular from countries like France.

Luxembourg Finance Minister Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, had diplomatically added his voice to those who call for a change in policy.

After formerly seeking to reassure the public about the health of the eurozone economy, Juncker now has begun to worry about risks to eurozone exports from a growing gap between US and eurozone interest rates.

The US Federal Reserve has carried out two spectacular interest rate cuts in eight days, bringing its Fed funds rate down from 4.25 percent to 3 percent and has left the door open to further decreases.

The Fed had sought to calm financial markets that fear the US economy is heading for recession.

However, maintaining its own rate at 4 percent would mean the ECB is exacerbating the euro's external value and making eurozone exports more expensive.
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