Fed, ECB rates seen on hold this year despite turmoil

LONDON (Reuters) - The U.S. Federal Reserve and the European Central Bank will not cut interest rates this year to calm wild markets but may be forced to engineer rescues for more ailing financial institutions, a Reuters poll showed.

The survey of 71 economists was taken on September 17, a day after the Fed swung an $85 billion lifeline to troubled global insurer AIG and soon after the collapse of investment bank Lehman Brothers, showed no move in U.S. rates this year.

It showed the ECB remaining on hold this year, with the consensus backing an earlier than previously expected cut in the first quarter of 2009. Only the Bank of England was expected to cut borrowing costs this year -- likely in November.

But the snap survey also showed that 41 of 48 economists say that AIG won’t be the last financial institution to get some form of lifeline as the credit crunch runs through the early stages of its second year.

“Central banks seem to have a preference for the non-monetary policy solution,” said Mark Wall, economist at Deutsche Bank in London. “The Fed didn’t blink last night despite markets wanting them to cut rates.”

The Fed held the federal funds rate steady at 2.0 percent on Tuesday despite screeching calls from Wall Street beforehand, as stock markets sank, to deliver an aggressive cut.

The poll showed Fed rates on hold until the third quarter of next year when it will raise rates as the economy manages to gain some traction.

The ECB is also forecast to keep up its anti-inflationary stance and offer no cut in its benchmark rate, which it raised to 4.25 percent in July, until the first quarter of next year. A poll on Sept 11 had shown no cut until the second quarter.

Analysts also said that market turmoil could yet get the better of all central banks and force them to take action. Stock markets took another battering on Wednesday and overnight U.S. dollar money markets are still clogged.

“They (the Fed) would prefer not to cut rates ... But if lending markets remain strained and stocks keep falling then the Fed may have to cut another 50 basis points to offset that stress,” said Abiel Reinhart at JP Morgan in New York.

He said the Fed would likely leave rates on hold as long as markets manage to calm themselves down.

The poll also showed a majority, or 29 of 57, expect the current financial crisis to last another six to 12 months, while 18 saw it persisting for a year or more. Only 10 saw it lasting just another three to six months.

The ECB has stuck rigidly to its separation of monetary policy and its additional liquidity operations aimed at injecting activity back into lifeless money markets. The Bank of England has also shown reluctance to cut while inflation is running at more than double its 2.0 percent target.

Economists see an ECB cut coming in the first quarter of next year, followed by two more next year as the euro zone economy loses speed, leaving rates at 3.5 percent by the end of 2009.

The Bank of England is forecast to cut rates in the fourth quarter this year and again in the following three quarters to leave rates by the third quarter at 4.0 percent.

Just last week economists saw a cut not coming until the first quarter of next year.

Polling by Bangalore Polling Unit; Editing by Patrick Graham