The prospect of an interest rates cut may be more distant than people thought. Many in the markets had hoped the European Central Bank (ECB) might follow the lead of the US Federal Reserve's surprise interest rate reductions over the past two months.

However, European economic data has broadly remained stable and the big question mark in the ECB's mind appears to be the state of the US recovery. A U-shaped or preferably a V-shaped recovery in the second half of this year is what the ECB still appears to be expecting. If that is what happens then it is even conceivable that there will be no rate cuts at all.

A V-shaped recovery would imply a recovery in the second half of the year to a moderate rate of economic growth. Such a scenario would prevent the euro from weakening again and would also avoid a major fall-off in exports to the US.

The worst-case scenario is a so-called L-shaped recovery, or in other words no recovery at all with the US economy merely kicking along the bottom for a prolonged period. If that happens, European interest rates would have to fall. However, the euro's current performance implies that the ECB's thinking is misguided. At the end of last year, the ECB hoped that the euro's persistent weakness had been reversed. However, the currency is now trading around 90 cents again, well below the level that growth differentials between the US and euro-zone economies would dictate.

First quarter growth in the US is expected to be close to zero whereas growth in Europe is likely to be around 2 per cent. For the year as a whole, European growth is expected to average about 2.7 per cent, while US growth is expected to pick up to around 2 per cent.

Those levels of differentials would be expected to lead to a strong euro and weak dollar. The fact that this is not happening means there is something wrong. It would appear that the markets at least believe that the ECB is in danger of damaging growth prospects by maintaining high interest rates. In contrast, in the US, the markets believe that the Fed's preemptive cuts will boost growth prospects later in the year.

As the rate differential between the two zones has narrowed, accepted theory would suggest that the euro would be boosted because of its stronger growth prospects. Instead the markets are convinced that the US Fed is highly attuned to growth needs while the ECB is almost indifferent.

Of course, part of the reason for this is the different mandates of the ECB and the Federal Reserve. The ECB need only consider inflation, while the Fed has the dual mandate of price stability and growth or employment.

But as some analysts, such as Mr Jim Power, investment director at Friends First, have argued, there is no need for the ECB to be so coy.

Inflation at 2.6 per cent may be above its self-imposed target of 2 per cent but the contributory factors are oil prices and the BSE crisis, which is pushing up food costs.

On an underlying basis, price rises are far more subdued, wage pressures are not intense and consumers are in no danger of overspending. The fact is that many in the markets simply do not believe that the ECB has the capability to stimulate growth and is months behind the economic data.

As Mr Colin Hunt, head of research at Goodbody Stockbrokers, puts it: "The rate gap has narrowed, but the credibility one has not."

He argues that Europe needs an interest rate cut to boost consumer spending. The weak value of the euro has already benefited exporters who are doing reasonably well, but consumers are still being left behind in many European states.

"This is a golden opportunity with the US economy on its knees and heading into recession," he said. "Rates should be cut to boost growth in Europe, while the euro would appreciate."

Indeed, the US economic background is deteriorating almost by the day. As Mr Power notes, there were 33 warnings from US corporates on profits in the first three months of last year. In the first two months of this year, there have already been more than 300 such warnings.

The picture is far more mixed in Europe. German business confidence has risen, French consumer spending is strong, but its business confidence is lower.

The implication is that growth will slow, but not anywhere near the dramatic fashion expected in the US.

The message seems clear. The ECB should cut rates and quickly - perhaps at the meeting in Dublin on March 15th. That would boost the euro thereby helping to dampen inflation. It would also help consumer spending and boost growth.