POLL-ECB March rate hike on the cards, risk of Feb move fades

Thu Jan 11, 2007 12:48pm EST

By Natalie Harrison

LONDON Jan 11 (Reuters) - The European Central Bank will probably wait until March to assess the latest economic growth data before raising interest rates again in a bid to tame inflation, a snap Reuters poll showed on Thursday.

The median forecast in the survey of 63 economists, taken after the ECB kept rates on hold at 3.5 percent on Thursday as widely expected, showed an 80 percent chance of a 25 basis point rate hike in March to 3.75 percent.

That compared with a 80 percent median forecast given for a rise by the end of the first quarter in a poll last week.

The ECB now appears less likely to raise rates next month after the bank's president Jean-Claude Trichet omitted the word "vigilance" -- usually a signal for a pending rate rise -- in a speech made after the rate decision.

Only four economists in the Reuters survey said the next ECB rate move would come in February, while 58 predicted a 25 basis point hike in March. Only one, Citigroup, said there would not be a rate rise in the first quarter.

"His (Trichet's) statements seem consistent with our expectation of the next move in rates coming in March rather than in February," said Sandra Petcov, economist at Lehman Brothers in London.

"The 'strong vigilance' phrase was purposefully omitted and he said he would not want to change market perceptions of a change in rates by the end of the quarter."

But median forecasts in the poll still show a significant one-in-five chance of a February quarter point rate rise.

In contrast money markets completely wiped out chances of a quarter point-hike in February after the press conference from around a one-in-three chance of such a move before Trichet's comments. A move by the end of March is fully priced in.

PEAK AT 4 PERCENT?

Policymakers will have little new hard data to consider by the Feb. 8 meeting but will have fourth quarter economic growth figures -- released on Feb. 13 -- to chew over ahead of the March meeting.

The bank should also have more solid evidence by then of whether concerns about higher wage demands have proved correct. If so, a March hike could well be followed up by another -- probably in the third quarter -- to rein in inflation.

Median forecasts showed rates at 3.75 percent by the end of March and then rising to 4.0 percent by the end of the third quarter and staying at that level until mid-2008.

Money market expectations of a further hike to 4 percent by September were also scaled back fairly dramatically -- from 90 to around 64 percent before and after the press conference respectively.

In contrast the poll showed 32 of 62 economists, a slight majority, see rates at 4.0 percent by the end of September compared with 40 of 72 in last week's poll.

"We are definitely increasingly leaning towards the view that they will go to 4 percent," said Howard Archer at Global Insight in London. "They are clearly looking at wage settlements and talk of wages moving higher, particularly in Germany".

The signs so far are eurozone economic growth will hold up well in 2007, laying foundations for further policy tightening. Employment and business confidence have risen strongly and activity in services and manufacturing is high.

A strong recovery in Germany economic growth in 2006, to its fastest pace in six years, has also boosted confidence the euro bloc's biggest economic would shrug off any dampening impact on consumer spending from this month's three percent VAT increase.

German gross domestic product (GDP) growth was 2.5 percent last year -- buoyed by resurgent domestic spending and strong exports -- almost triple the 0.9 percent GDP growth in 2005.

(Additional reporting by Bangalore Polling Team, Nigel Davies and Ross Finley in London)

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((Editing by Ron Askew; Tel: +44 207 542 2687, Reuters messaging: natalie.harrison.reuters.com@reuters.net)) Keywords: ECB RATES/POLL

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