Duisenberg set to miss ECB policy meeting

Not only are interest rates on hold at the European Central Bank. Major decisions at the ECB headquarters are awaiting the installation of its new president, Jean-Claude Trichet.

Issues as diverse as how eastern European nations should prepare for the euro and who should fill an important ECB position await Trichet's arrival in November.

ECB President Wim Duisenberg's decision to miss Thursday's policy-setting meeting, something virtually unheard of for a top central banker, has sent a clear message that euro zone rates will remain unchanged at two percent for months ahead.

This follows Duisenberg's equally unusual move of cancelling a late August meeting that was to take a health check on the euro zone economy - another first for the ECB.

It makes the central bank look a little bit rudderless, some economists say.

"It points to the fact that Duisenberg is finished with the active conduct of policy and is leaving it to his heirs to sort out," said Julian von Landesberger, economist at HVB Group.

Trichet, now governor of the Bank of France, is set to take over on November 1, once he wins backing this month from the European Parliament and then European Union leaders

"There are not going to be any surprise measures for a while," said Landesberger.

Certainly the ECB can get into gear quickly if needed, and Duisenberg assured this spring he would be no lame duck president. Still, as Ulrich Beckmann, lead Frankfurt researcher for Deutsche Bank said: "It shows the ECB feels comfortable with things as they are, and this will be the case for some time."

POT STILL BUBBLES

Yet there are some hugely political issues brewing in Eurotower, the ECB's Frankfurt home.

ECB staff are working hard on proposals for how to apply the Exchange Rate Mechanism to Eastern European countries wanting to adopt the euro. Under debate is at what exchange rate should countries enter ERM II, and should narrower trading bands be required than the ERM II agreements require, an ECB source said.

ECB policymakers are also as anxious as ever to convince politicians in the biggest existing member countries that cutting their budget deficits will do more for economic growth than calling for interest rate cuts.

Another ECB priority is revamping Europe's complex payment and settlements systems. By cutting costs and making it more efficient, the ECB can get monetary policy decisions coursing through the economy far more quickly than the 1-1/2 to two years it now takes rate cuts to have an effect, thus promoting growth.

This is an ambitious and important agenda. But UBS Warburg analyst Holger Fahrinkrug said top-level decisions can wait. "It's not the time to be making important decisions," he said.

One clear sign that the ECB Executive Board wants to give Trichet a free hand is the decision to delay recruiting a new Director of Communications. Manfred Koerber retires from the post on October 31.

Sending clear and coherent messages on the direction of monetary policy to financial markets, often seen as a weakness of Duisenberg's, is one policy area that ECB watchers say Trichet will need to put his distinctive stamp upon.

Some ECB sources said Trichet may seek to do that by installing a kitchen cabinet of two or three trusted aides in his executive suite in the Eurotower. But a Bank of France source said there was no such word circulating in Paris that he was aware of.

Meanwhile, any sense of hiatus at the ECB also reflects the hard work done by Duisenberg in the first five months of this year in pushing through decisions on major issues - a new voting system for when the ECB membership expands beyond 21 countries, and an overhaul of its monetary policy strategy.

"They had enough time to get ready and be prepared for this period, and they did it," said Fahrinkrug.