LONDON, Dec 21: The world’s four major central banks will hold rates at current low levels till end-June 2003 due to the need to boost confidence sapped by fears of war in Iraq and tumbling stock markets, according to a Reuters survey of bond strategists.

In the survey taken December 12-17, the mid-range of forecasts showed the US Federal Reserve would keep the Fed funds rate at 40-year lows of 1.25pc until the end of June next year, while the European Central Bank’s benchmark refi rate is forecast at 2.75pc until end-June.

But by the end of next year signs of a stronger global recovery will trigger a 25 and 50 basis point rise respectively in the euro zone and the United States, the poll of 48 bond strategists showed.

In Britain, the Bank of England is expected to hold the benchmark repo rate at a 38-year low of four percent until end-June and hike to 4.50 per cent by end-2003, while in Japan no change is expected from effectively zero per cent rates.

Strategists said weak global growth, excess capacity, companies’ limited pricing power and subdued wage growth will keep a lid on price pressures and that major central banks are more worried about deflation than inflation.

We have the possibility of war in Iraq...that has a negative impact on global sentiment, said James McKay at ITD Capital Markets in London. The world is still coming to terms with the fall of stock markets in recent years.

The US Fed cut interest rates by a half percentage point in November and the ECB followed suit in December. The BoE has been on hold since November 2001.

When we see the November data for Europe, it should show some stabilisation in line with the United States, said John Normand at JPMorgan in London.

But many of those polled said the risks up to June 2003 are still for further interest rate cuts, rather than rises.

Around a quarter of the strategists in the survey see a move within six months by the central banks of the United States, the euro zone and Britain and most of these forecast a cut.

That is because consumers in the United States and Britain are already heavily in debt and persuading them to spend more to spur global economic activity is becoming more difficult.

There isn’t much left in the pipeline (in the United States). The latest cuts have had precious little effect, said Rob Carnell at Commonwealth Bank of Australia in London. But they will choose to keep on trying to stimulate the economy.

Since the bursting of the stock market bubble in 2000 consumer demand has been the main driver of economic growth in Britain and the United States.

The Bank of Japan has no leeway on interest rates and can only try to stimulate demand by pumping up money supply, but the ECB could cut rates further, strategists said.

The decision to cut will be helped by inflation expected to fall below the ECB’s two per cent target ceiling in 2003.

A Reuters survey of defence analysts found 10 out of 18 expecting US-led military action against Iraq likely or very likely, probably in January or February. Most thought it would last for less than three months.

If any conflict lasts for longer then three months, oil supplies are threatened and sentiment deteriorates further then central banks may be forced to cut again, analysts said.

But if it is over quickly and confidence bounces then the most likely scenario is that the Fed, ECB and BoE will keep rates steady until strong signs of growth emerge and that is unlikely until the second half of the year.

One measure under consideration, which would boost sentiment, is abolishing double taxation on dividends. Dividends are taxed as corporate income and again as personal income.

Richard Berner at Morgan Stanley in New York thinks restrictive financial conditions in the United States are set to improve, to allow a more robust economic recovery next year.

Interest rates have come down, asset prices are off the bottom...the dollar is sliding and credit availability is on the upswing. The appetite for risky assets seems to be improving and people will shift their thinking from deflation to reflation.—Reuters