Likelihood of ECB Rate Hike Shrinking

The likelihood of the European Central Bank hiking interest rates again in September has shrunk from nearly 100% two weeks ago to just over 50% as credit market jitters persist, according to a poll of bank analysts by Dow Jones Newswires.

That shift received new impulse Tuesday when economic sentiment among German institutional investors and analysts was shown falling off sharply in August, according to the latest poll by Center for European Economic Research, or ZEW. The ranks of ECB-watchers who expect to hold off raising rates amid a global credit crisis are growing quickly. Of 33 financial institutions canvassed, 18 said a September hike of 25 basis points to 4.25% is still likely and 14 said it is no longer likely. One institution said it was too close to call. Only eight of those polled said they expect the ECB's policy rate to move to an even more hawkish 4.50% by the end of the year from 4.00% now. Even those projecting a hike noted there is higher uncertainty about the move given turbulence on financial markets. "At the moment, we still consider it more likely than not that the lessening market turmoil could enable the ECB to still deliver the September move," Bank of America said in a research note. "Still the probability that the ECB will raise rates in September or October has fallen to no more than 60% in our view," Bank of America. On Aug. 2, ECB President signaled a September hike by saying the council is "vigilant" on price risks - a word used to herald all eight of the bank's rate increases since the start to policy tightening in December 2005. But that was before global markets were hit by anxiety that a U.S. liquidity crunch driven by subprime mortgage markets was spilling into Europe and Asia. Over the past two weeks, the ECB and other major central banks have been pumping billions in extra liquidity into money markets to prop up their banking systems. The ECB again Tuesday gave cash-hungry banks extra funds in its regular weekly refinancing operation morning. The ECB allotted EUR275 billion in one-week funds, which is EUR46 billion more than the EUR229 billion 'benchmark' of what the ECB estimated banks need for routine business. Financial turbulence already has darkened economic expectations in some parts of Europe. Earlier in the day, the ZEW German think tank said German economic expectations plunged into negative territory at -6.9 points in August from 10.4 points in July. The reading was steeply lower than economists projections of -3.0 points. The 291 ZEW survey participants cited potential consequences to the German economy if the U.S. mortgage crisis spills over into the economy there, the ZEW said. Economic expectations for the euro zone also fell, with the corresponding ZEW index falling 13.3 points to -6.1 points. "Market turbulence will probably have an impact on the assessment of the macroeconomic outlook," said Silvia Pepino, economist at J.P. Morgan Research, adding that "in a fast-moving environment the outlook is under constant review." The Royal Bank of Scotland revised its euro-zone growth outlook for the fourth quarter of this year, and the first quarter of 2008, bringing the annual forecast for next year down to 2.1%, from 2.3% previously. The bank said it now puts the likelihood of a September ECB hike at just around 30%.