An interest rate cut may be on the way as early as this Thursday as the European Central Bank gets ready to head off downward pressures on global growth.
However, analysts are divided and some maintain that any rate cut will not be delivered until June when inflation has fallen and the euro appreciated.
The single currency has continued to remain under pressure, despite the recent turmoil in stock markets which would normally be expected to impact negatively on the dollar.
According to Mr Colin Hunt, head of strategy at Goodbody Stockbrokers, the vice-president of the ECB, Mr Jean-Claude Trichet, gave a very strong and transparent hint that the bank's view has now changed and that inflation is no longer a risk. "He is setting out the stall that a rate cut is desirable and fairly soon," he said.
Mr Hunt said the ECB may cut by as much as half a percentage point. "The ECB normally kicks off with a half percentage point move and there is a high chance we will get it on Thursday," he added. Indeed, three month interest rates have dropped almost a quarter of a percentage point in the last week as markets have anticipated a cut.
However, analysts at ABN Amro argue that the ECB will put off any moves until June - when euro zone inflation will be below 2 per cent. "The arguments for lower interest rates are building. "But it is not yet a done deal and markets are wrong to expect large rate cuts any time soon.
"At the moment the ECB cannot countenance a rate cut because the euro is too weak and inflation is above target. While there are sound economic arguments for looking through these two constraints, the ECB is keen to send the right signals on monetary policy. In this case, it wants to see a stronger euro and lower inflation before it cuts," they said.
But according to Mr Jim O'Leary, chief economist at Davy Stockbrokers, there is no question that the ECB should cut rates. "The issue is that Europe has to do its bit to ensure the world does not go into recession. If inflation is above target it is due to short-term factors and is not indicative of a serious underlying problem. "The US authorities and the markets are crying out for a cut and the international economy needs it - Europe has to do its part, it's called good global citizenship."
Analysts also argue that a rate cut would boost the euro, despite the lower returns on euro zone assets. According to Mr Hunt, "a larger cut will have a bigger impact but no change will mean the euro will dribble lower".
The euro closed yesterday at $0.8967, just above its level of $0.8926 last Friday. Mr Hunt added that the euro should have appreciated over the past few weeks, but failed to exploit the equity market turmoil because there is a feeling in the markets that the ECB is playing the wrong game.
"It is giving greater weight to inflationary pressures than growth pressures at a time when inflation risks being transformed into deflation."
