The United States Federal Reserve has capitulated to another rate cut as it continues aggressively to try to restart the US economy.

In eight months it had shaved three percentage points off its key interest rates bringing them to 3.5 per cent.

At 4.5 per cent European interest rates are now a full one percentage point higher than in the US, which is quite a turn of events.

This, together with falling inflation rates across the euro zone and slower economic growth in the key economies on this side of the Atlantic, is viewed by the market as providing a compelling case for the European Central Bank to cut rates.

The bank will meet next week, amid expectations that the first meeting after the summer holidays will see members deciding to cut interest rates.

A reduction of at least 0.25 of a per cent is expected, with an outside chance of a 0.5 of a percentage point reduction, which will be welcome news for borrowers throughout the euro zone.

Further US rate cuts are also on the cards. The Federal Open Market Committee's statement seems to indicate its concerns will linger for some time yet and leaves the way clear for further rate cuts this year to fuel an economic recovery.

When the initial rate cuts were sanctioned it earlier this year it was in the hope that a recovery would be in sight by the autumn. That recovery is now being pushed out until spring 2002.

The Fed believes there is still sufficient risk that economic growth will slow even further in the near-term.

Consumer spending is still holding up well providing some evidence that rate cuts and tax cuts have been effective.

But corporate America is continuing to suffer.

Poorer economic conditions at home and globally will only worsen matters and trigger further job cuts in the US and in their international subsidiaries.

The Fed appears satisfied that inflationary pressures are not emerging despite the lower interest rate environment giving it the option to cut rates again if it is deemed appropriate.

Given the continuing slump in economic growth investors will be looking for clear signs that the rate cuts are having an impact and how close US corporations are to reaching the bottom of the downward spiral.

The European Central Bank by contrast has been criticised for being too slow to recognise the scale of the downturn in economic growth in the major euro-zone economies.

The euro, however, has benefited from the weaker conditions in the US which have knocked-back the dollar.

Yesterday the euro closed at 0.9124 against the US currency and could strengthen further in the coming weeks.

Now that the Fed has done what the markets had expected the spotlight switches to the ECB.