The European Central Bank (ECB) has defied political pressure from across Europe by leaving interest rates unchanged at 3.75 per cent.

The euro fell sharply following the news, slipping below $0.89 for the first time in two weeks.

Economists criticised the decision but many predicted that the ECB will cut rates by 0.25 per cent at its next Governing Council meeting on November 8th.

European politicians have been pressing the ECB for some weeks to cut rates to boost the euro zone's economy. EU leaders last week drew back from issuing a joint statement urging "further decisive action" from the ECB.

In an interview with Bloomberg news, Minister for Finance Mr McCreevy repeated that politicians should stop hectoring the ECB.

"A lot of blips have been caused by politicians and even members of the bank" who had made comments, he said.

"The euro will become a major currency when the markets believe that this is a currency where decisions are made on a particular basis," he said.

Germany's Ifo Institute's business climate index has fallen to its lowest level since the 1993 recession, and the equivalent index in Italy has suffered its biggest ever monthly fall. Germany's leading economic institutes now expect the German economy to grow by just 0.7 per cent this year.

Ifo president Mr Hans-Werner Sinn expressed disappointment at the decision not to cut rates.

"It would have been good if they had cut interest rates because there are clear signs that growth in Europe is cooling. Now would have been the right time," he said.

The ECB is determined to be seen as politically independent, and pressure from EU politicians has often delayed rate cuts rather than accelerated them. If the ECB does not cut rates in two weeks, however, it risks being blamed for any subsequent downturn in the euro-zone economy.

Some economists argue that a quarter point cut in interest rates would have little impact on the economy. Mr Edgar Meister, a member of the board of the Bundesbank, yesterday praised the ECB for holding fire.

"There is no compelling reason to cut interest rates now. The ECB should not exhaust all its options. It's a question of the right timing. I would see some room for manoeuvre before the end of the year," he said.

The ECB's rigid monetary policy is causing particular concern in Germany, which accounts for one-third of the euro zone's GDP. Finance Minister Mr Hans Eichel recently made a thinly-disguised plea to the ECB to cut rates.

"Sticking to our solid, medium-term policy and falling inflation makes it easier for the ECB to support the process of recovery in Europe with more favourable monetary policy conditions, without danger to price stability," he said.

The ECB believes the euro-zone economy remains fundamentally strong and that it will recover in 2002. But falling inflation and slower money supply growth mean most analysts predict that the ECB will cut rates on November 8th.

Era of tax cuts and spending increases is over: page 7