Consensus market expectations suggest the European Central Bank will impose a 50-point cut which would bring the rate down from 3.25 per cent to 2.75 per cent, a low in historical terms , writes Una McCaffrey

Few doubt that interest rates will be lower this evening than they were when day broke over the cities and towns of the 12-state euro zone. It is, it appears safe to say, all over bar the shouting.

In this case, it seems that any "shouting" likely to occur within the hushed corridors of the European Central Bank (ECB) will be focused on one issue: the extent of the cut.

Speaking to a German newspaper less than a week ago, Bundesbank chief Mr Ernst Welteke came straight out and said that he and his banker colleagues would not only be weighing up the timeliness of a cut, but also whether it should be of 25 or 50 basis points.

For a member of the notoriously closeted governing council of the ECB, this seemingly innocuous statement was nothing short of shocking.

A cut of 50 points would bring the ECB rate down from 3.25 per cent to 2.75 per cent, a low in historical terms.

Consensus market expectations suggest that the bank will choose this option, seeking to cause maximum impact on confidence levels among euro-zone consumers and businesses. Dr Dan McLaughlin, chief economist with Bank of Ireland, says the latest generation of central bankers tends to be much more concerned with the short-term psychological impact of rate cuts than with their long-term monetary effect, a trend that raises the likelihood of a 50-point reduction.

"At the end of the day, if people are not going to rush to borrow money at 3.25 per cent, they're not going to rush out to borrow at 2.75 per cent. What you can shock, however, is confidence."

Dr McLaughlin attributes the "shock factor" to the widespread media coverage that interest rates now attract.

He warns, however, that while consumers might be treated to a rate cut as a pre-Christmas boost, businesses are unlikely to do the same. "The big uncertainty for most corporates is the Iraqi situation," Dr McLaughlin says, acknowledging, however, that if a rate cut lifts equity markets, confidence in the business sector will obviously benefit.

As for the likely effects on the Irish economy, Dr McLaughlin argues that global economic conditions and currency movements are of much more relevance than interest rates.

He expects an easing to make its presence felt in more subtle ways however.

"Because of the importance of home ownership in this market, a change in mortgage rates has a much bigger impact here than it would in most other countries."

A cut would thus add to an already growing imbalance between general consumer borrowing and mortgage borrowing, according to Dr McLaughlin.

Mr Robbie Kelleher, chief economist with Davy Stockbrokers, is also betting on a half-point cut, but again plays down the direct effect this will have on monetary trends.

"That said, it's a positive rather than a negative," says Mr Kelleher. "What's been missing in the euro zone is a buoyancy in consumer demand. This cut may give some support to that."

At home, Mr Kelleher says that a cut could add more fuel to a housing market that has already been booming for several years. While this would not necessarily be a healthy development, Mr Kelleher says that the Irish economy will still, on balance, benefit from an easing.

"Business spending is more dominated by the shortage of capacity and confidence about the economy. In that sense, I think it's a positive," says Mr Kelleher.

If the ECB does choose to cut 50 rather than 25 points, Mr Kelleher says that policy will probably be frozen for a while.

"That'll be it for the time being," he says.

Mr Colin Hunt, director of research with Goodbody Stockbrokers, is also expecting a 50-point cut, reasoning that if anything less is delivered, the already-delicate credibility of the ECB will be damaged.

A cut would, he says, "show that the institution is not tied to an inflexible interpretation of current inflation and current money supply growth levels."

Mr Hunt argues however that neither a 50- nor a 25-point cut would leave interest rates in a particularly "stimulatory setting", in low-growth states such as Germany.

As for the Republic, he says that a 50-point cut could be positive for consumption growth. Timing is all-important here, Mr Hunt says, noting that an easing could help to cancel out the potentially negative effects of the Budget on domestic sentiment.

Mr Dermot O'Brien, chief economist with NCB Stockbrokers, differs from the pack somewhat in forecasting a 25-point cut now and a further, similar, easing early next year.

"The ECB is a cautious organisation that doesn't move fast. They pride themselves on not being as active as the Federal Reserve," says Mr O'Brien.

Despite appearances, the bank is also likely to keep a worried eye on inflation levels, Mr O'Brien believes. Stagflation - where slow growth is accompanied by rising prices - could be a significant fear, he says.

The visible effects of this two-pronged approach will be limited, according to Mr O'Brien. He does not accept, for example, that a housing "bubble" will be created in the Republic simply because borrowing is cheaper.