The European Central Bank is poised to hold interest rates steady tomorrow as plans by European governments for major tax cuts to boost growth could complicate rate cuts expected for later this year.
Some ECB watchers are warning that fiscal stimulus programs in Germany, Italy and France - the three major economies of the euro zone - without clear promises to cut budgets threaten the ECB's goal of price stability and create investor uncertainty.
Against this backdrop, they argue, ECB policymakers may well prove more reluctant to cut interest rates again in September or even October, especially if inklings of an economic recovery are starting to emerge.
One major hedge fund manager, who asked not to be named, said he was betting on no ECB rate cut in September while governments sort out their 2004 budget plans.
The ECB meets tomorrow to discuss interest rates and holds its final press conference before a summer break. In a Reuters poll this week, no ECB watchers forecast a cut in euro zone rates, already at record lows of 2.00 per cent following a half percentage point cut last month.
Most analysts expect a September rate cut, but financial markets are growing more dubious.
Euribor futures are pricing roughly a 50 per cent chance of a 25 basis point move in September, and a 75 per cent chance by December.