The European Central Bank (ECB) continually confounds expectations as to interest rate changes in the euro zone. Although the bank claims transparency, most observers find the ECB more difficult to fathom than the US Federal Reserve or the Monetary Policy Committee, which sets British interest rates.

The latter meets every month and publishes detailed minutes two weeks later which include the vote taken, while the Fed also releases minutes and voting patterns of the meetings.

The money markets are generally aware of the factors driving policy-making in both banks and interest rate changes rarely surprise. In contrast, the market has often been surprised at the timing of ECB decisions - witness the reaction to the quarterpoint rate cut in early May. The fact that the ECB meets every two weeks may add to the uncertainty but the ECB also refuses to issue minutes or to reveal the votes of the 18-member council which sets rates (the bank claims votes are not even taken).

Communication of the ECB's views is left to the publication of its monthly bulletin, a monthly press conference and to ad-hoc speeches by council members. The signals sent by the various ECB spokesmen can be confusing and sometimes even contradictory, although yesterday's decision to leave interest rates unchanged at 4.5 per cent was flagged in unusually blunt terms a few days earlier by Mr Wim Duisenberg, the ECB president.

What do we know about the ECB's view of the world? The bank's remit is to keep inflation below 2 per cent, so the current reading of 3.4 per cent would imply little need to cut interest rates. Yet it has lately taken to repeating the view that the recent increase in inflation is largely due to oil and food prices and is transitory. Moreover, inflation is expected to fall below the 2 per cent target in 2002, so on that basis the ECB is more relaxed about the outlook for prices than it was at the turn of the year.

However, we know nothing about the bank's projection for inflation in 12-18 months' time, the normal time-lag between any interest rate changes and the impact on economic activity and the price level. What is clear to market observers is that economic growth in the euro zone is slowing sharply which will mean a similarly sharp deceleration in inflation in 2002.

The slowdown started in Germany but has now spread to France and beyond, with consumer confidence now falling following earlier declines in industrial confidence. In fact, it is possible that the German economy experienced negative growth in the second quarter and unemployment there has risen by more than 50,000 since January.

The slowdown has not escaped ECB notice, but it still expects euro-zone growth of around 2.5 per cent this year - a long-term average figure that looks too optimistic - a sub-2 per cent reading looks very likely. This optimism may explain the reluctance to cut rates further but it begs the question as to why rates were cut by a quarter of a point two months ago.

The risk now is that if the bank persists in its refusal to ease monetary policy, the current cyclical slowdown turns into something more serious: consumer confidence has started to fall, which may prompt cutbacks in spending and lead to a sharper and more prolonged period of weak growth, with the attendant implications for employment, company profitability and exchequer finances.

The other casualty would be the euro, which has already fallen by 30 per cent against the dollar since its inception. A series of rate cuts by the ECB may not be enough to turn the beleaguered currency round, but it would help to convince sceptical investors that the eurozone's medium-term growth prospects are not quite as dismal compared to the US as most seem to believe, judging by the scale of capital outflows from the euro area (€420 billion, or £330 billion, over the past 30 months).

The euro may well still re-test its lifetime low of 82.3 cents in the coming months regardless of the ECB, but its obdurate refusal to cut rates in the face of weakening activity could push the euro even lower with 80 cents or lower a distinct possibility before year-end. This would leave the punt/dollar rate at a sliver over parity and the punt/sterling at 72 pence, assuming that sterling continues to trade in line with the greenback.

Dr Dan McLaughlin is chief economist at Bank of Ireland