THE EUROPEAN Central Bank (ECB) is likely to cut interest rates in the coming months, according to Alan McQuaid, chief economist with Bloxham Stockbrokers.

"Slowing economic activity should eventually dampen inflationary pressures and, with activity indicators already at levels which in the past have been consistent with interest rate cuts, we think that the next move from the ECB will be down and not up, though we may have to wait until early 2009," he said. "Overall, we see the ECB's key lending rate running at 3.5 per cent by the end of next year as against 4.25 per cent now."

Earlier this month, the ECB raised its main lending rate by a quarter point to 4.25 per cent, the first hike since June last year.

The decision had been widely expected following the publication of data which showed euro-zone inflation had reached an all-time high of 4 per cent in June, well ahead of the ECB's inflation target of 2 per cent or below.

However, at the time, ECB president Jean-Claude Trichet said he had no bias towards further rate rises. This was taken as a signal that the last rise was a one-off.

Despite the euro zone's unexpectedly strong start to the year, there were clear signs the economy was slowing, making another rate rise unlikely, said Mr McQuaid. "Indicators of euro land business sentiment have continued to ease and suggest that growth could slow quite sharply over the coming months," he said.

New data on Monday showed euro zone industrial output posted its biggest monthly fall in May since 1992, said Mr McQuaid.

In the United States, inflation is also emerging as a key concern. US inflation accelerated at the fastest rate in 26 years in June, fuelled by surging energy prices. Inflation rose by 1.1 per cent last month, the fastest monthly gain since June 1982, according to the US labour department. This was way above the 0.7 per cent expected by economists and analysts.

Energy prices advanced 6.6 per cent during the month, reflecting a 10.1 per cent surge in gasoline prices, as consumers are paying well in excess of $4.00 (€2.50) a gallon. Prices were up 5 per cent from a year ago, the biggest year-on-year rise since 1991, the department said.