A cut of at least a quarter of a percentage point is now thought likely at the European Central Bank council meeting on July 1st, according to informed sources. In turn, this would lead to further downward pressure on bank and building society interest rates here.
Frankfurt observers believe that if there is no sign of a sustained recovery in euro zone output, the ECB will act by cutting rates once again to around 2.25 per cent. This is despite repeated comments from the ECB president that the cut on April 8th "is it".
The main reason for a further cut would be to stimulate demand in Germany and Italy.
According to Frankfurt analyst Mr Allen Saunderson, the ECB is more bearish about euro zone prices than the market believes. In its latest monthly report it points to further downward pressure on prices.
The ECB does not want to point to any specific deflationary risk, as it feels that to do so may risk provoking a retrenchment among consumers. Household consumption has been the only positive indicator across the euro zone in recent times and even this has turned negative in the largest economies.
Sentiment on employment, which tends to be a major influence on consumer confidence, has also turned down.
The ECB is worried that falling manufacturing output will lead to a further slowdown in GDP growth, leading to a downturn in household consumption and then to the further marking down of consumer prices.
The theory is that all of those could lead to a demand downturn which could ensure that consumers start hesitating about future consumption. If this is combined with declining prices of goods imported from Asia then the trouble is even more acute.
In addition, even the few signs of recovery from Asia are not good news, as NCB economist Mr Dermot O'Brien has pointed out. Some of the Asian tigers compete directly with Germany in key product areas and are more competitive now than they were 18 months ago before their devaluations.
There are also worries that even the low levels of consumer price inflation recorded across the euro zone may be overestimated. In its latest bulletin, the ECB pointed out that neither sustained price rises over 2 per cent nor sustained declines would be consistent. However, it cannot put a lower limit on it as there is a measurement bias.
The ECB President, Mr Wim Duisenberg, said as much when he was questioned here on a visit last November.
Moreover, with inflation now running at 1.1 per cent on average, there are definite danger signs.
It is thought that the ECB chief economist, Mr Otmar Issing, has asked his team to look for more indicators of actual demand and, as a result, measures such as industrial confidence are having more impact on board decisions than many have assumed.
Industry and consumer confidence measures are not only negative in Germany but in France and Italy. The consumer measure has peaked in Italy and looks as if it may have fallen back in France.
Unless these indicators turn around over the coming months, and particularly if there are further falls in employment, a rate cut in July and possibly another in the autumn is thought to be firmly on the cards.
