The European Central Bank will likely keep its main lending rate steady tomorrow amid unprecedented market turbulence but pressure is building for a cut in the coming months.
ECB president Jean-Claude Trichet has repeatedly cited inflation risks for the ECB's insistence on holding interest rates steady or even increasing them, as in July, instead of going for a reduction to spur slumping economic growth.
Most analysts fully expect the ECB to leave rates on hold at 4.25% when its governing council meets in Frankfurt despite a slowdown in inflation and the worst financial crisis since the Great Depression of the 1930s.
However, at some point, they believe an interest rate must come, perhaps as part of a coordinated move to encourage the commercial banks to begin lending again so as to avoid a deep and long lasting recession.
Inflation in the euro zone eased for the second month running in September to 3.6%, from 3.8% in August and a record 4% in July. That is still way above the ECB's target of just below 2% but it reinforces the view that inflation might finally have peaked.
Meanwhile, the failure on Monday by US lawmakers to approve a $700 billion plan to bail out the US banking system rattled European leaders struggling to protect their own banks.
Most analysts feel an immediate decrease is out of the question because the ECB raised its rate in July and such a quick about-face could spark panic in tense financial markets.
Central banks have flooded money markets with cash to keep interbank lending going but it appears the funds are being hoarded by banks unwilling to lend to each other or put into the safety of US government bonds.
The result is that the money markets - where banks normally secure crucial short-term financing - remain frozen as the credit crunch bites ever deeper and claims more victims.
