The European Central Bank (ECB) is expected to leave interest rates unchanged at 2.75 per cent when its Governing Council meets in Frankfurt today. But markets will listen closely to remarks by the ECB President, Mr Wim Duisenberg, for hints that an interest rate cut could come within a month.

Inflation in the euro zone fell to 2.1 per cent in January, its lowest level since last September. Economists predict that, unless oil prices soar due to the threat of war in Iraq, inflation will fall below the ECB's target of 2 per cent next month. The euro's recent strength against the dollar is expected to dampen inflation by making imports less expensive.

The case for a further rate cut was reinforced yesterday by news that German unemployment had leapt to 4.62 million, or 11.1 per cent of the workforce. Germany now has the second-highest unemployment rate in the EU after Spain and in the formerly communist east of Germany almost one worker in five is without a job.

German retail sales in 2002 had their worst performance in 20 years and Berlin now expects the economy to grow by only 1 per cent next year. Strict budget limits imposed by the Stability and Growth Pact mean that the German government cannot cut taxes to boost growth and may even have to increase taxes to keep its budget deficit under control.

The ECB insists that its primary role is to maintain price stability in the euro zone rather than to facilitate economic growth. But the central bankers know that a slump in Germany, which accounts for one- third of the euro-zone's GDP, could have disastrous consequences for the European economy as a whole.

Members of the ECB's Governing Council have dropped strong hints in recent weeks that a further rate cut is possible if economic growth remains weak. Few market observers expect a move on rates today but most are confident the ECB will cut rates by 0.5 per cent when its Governing Council meets in early March.