The European Central Bank (ECB) looks likely to keep interest rates on hold at 4 per cent on Thursday due to ongoing money market turmoil.
Economists say this is the trickiest call in the ECB's current cycle of interest rate hikes as the bank seeks to keep the banking system running smoothly without losing sight of longer-term inflation dangers.
Nonetheless, economists still expect the ECB to raise rates by the end of the year, unlike the US Federal Reserve, which is expected to cut at its September 18th meeting.
Most economists expect the euro zone economy to grow healthily this year and next, and do not see a major impact from the US subprime mortgage crisis.
Instead it is the unexpected exposure of two German banks, IKB and SachsenLB, to these subprime mortgages that has made banks reluctant to lend to each other, forcing the ECB to issue emergency loans to keep the financial system running.
These loans have succeeded in persuading banks to lend to each other for up to a week, but for typical three-month terms banks are demanding record risk premia if they will lend at all.
Thus an ECB rate rise now is arguably unnecessary as banks' borrowing costs have already risen of their own accord.