Regular readers of Central Bank of Ireland reports will be familiar with the rather turgid and obscure style of the prose. One had to shift through the carefully worded double-speak for any hint of the Bank's true strategies. The ambiguity and vagueness, of course, served as a suitable buttress against objective criticism. It was virtually impossible to pin the Bank down on any policy issue.

It comes then as a refreshing change to read the frank, all-cards-on-the-table reports now published by the new European Central Bank (ECB). Policy targets, underlying strategies, forecasts and assumptions are all spelt out in considerable detail.

As is repeatedly made clear, the ECB's only policy objective is to keep euro-zone inflation within a band of 0 to 2 per cent. Since the current inflation rate is 0.9 per cent, there really is little pressure on the ECB to do anything but sit tight.

To maintain this state of affairs, the ECB has adopted a "new and distinct" strategy. This strategy is, however, really a combination of two established economic theories dressed up in new apparel.

Referred to by the bank as a "well-known equation", Pillar 1 is the old quantity theory of money. This theory advocates control of the money supply in order to constrain inflation. The theory is bedrock monetarism and its use will appease institutions such as the Bundesbank.

The ECB has set a specific reference rate of 4.5 per cent for the growth in the money supply to achieve its inflation target. Any deviation from the reference rate will prompt a policy response but not in a "mechanical manner".

Too fast a growth rate and the ECB will act to cut the money supply, thereby raising interest rates. Conversely, a slow growth rate may result in a reduction in interest rates.

Pillar 2 is the "inflation targeting" approach currently employed in countries such as New Zealand, Canada, Britain, Finland, Sweden, Australia and Spain.

This policy involves using "leading indicators" to forecast inflation. The forecast rate is then compared to the target inflation rate. The difference determines how much monetary policy has to be adjusted.

The success of the overall strategy hinges on convincing the public that the inflation target is credible. If the target is adopted by the public, it acts as an anchor for inflation expectations. The target can then become a self-fulfilling prophesy.

This is, of course, why the ECB is so forthcoming in publishing the details underlying its policy. To build credibility, the strategy has to be clear, understandable and transparent.

But should the public take the ECB at its word and adopt the inflation target? It is early days yet, but sooner or later some hard questions will have to be answered.

For instance, can inflation be accurately forecast? If, in a small State like Ireland, economists are divided on the determinants of inflation, what hope is there for forecasting inflation in the euro zone with 11 diverse economies?

There is a view that, because the errors tend to cancel, forecasting inflation in the euro zone may not be as difficult as doing it for each individual state. Apparently, it is harder to forecast Boston inflation than US inflation.

Realistically, however, the single currency experiment is without parallel in economic history and all the old structures have changed. This creates uncertainty and makes forecasting particularly difficult.

Another potential problem is that the two pillars to the strategy may provide mixed signals and this could undermine credibility.

For example, from the perspective of Pillar 2, all the "leading indicators" are at present pointing to a decrease in inflation expectations. If anything, deflation is of greater concern than inflation.

Moreover, while the ECB's mandate is strictly price stability, it will be concerned that real economic growth in the euro zone has slipped to 2.7 per cent. This is well below the 5.6 per cent being recorded for the US economy. Also, confidence indicators are down and unemployment remains stuck at 10.8 per cent or 13.8 million people. The US unemployment rate, in contrast, has decreased to 4.4 per cent.

Pillar 2, therefore, unambiguously points to an easing of monetary policy and lower interest rates.

Pillar 1, however, goes in the opposite direction. The money supply is currently growing at 4.7 per cent, marginally above the reference rate of 4.5 per cent. Given the importance attached to the money supply in the overall strategy, there is little possibility of a reduction in interest rates while its growth rate remains above the reference rate.

Other factors operating to increase inflation include the fall in the euro exchange rate, the recent upsurge in private sector credit and wages and the hike in oil prices.

Overall, it is not surprising that the ECB decided to leave interest rates unchanged at its recent meeting.

Another crucial issue underlying the strategy is whether changes in the money supply and interest rates are enough to curtail inflation or prevent deflation? Take the more pertinent deflation issue.

There is obviously a floor beyond which interest rates cannot fall. The key interest rate is currently 3 per cent and, allowing for inflation, the real rate is at 2 per cent. There is clearly only limited scope for any further decreases. Furthermore, even if the ECB could engineer a cut in interest rates, would this be enough to kick-start the euro economy and prevent deflation?

The Japanese experience is informative in this respect. Interest rates in Japan are now down to 0.35 per cent but the real growth rate is at minus 3.6 per cent.

There really is nothing more the Japanese monetary authorities can do to lift the economy out of its current depression. Monetary policy is, in effect, redundant. This is the famous liquidity trap John Maynard Keynes wrote about more than 60 years ago.

The ECB will be anxious not to manoeuvre itself into a similar situation. If interest rates were cut and economic growth in the euro zone did not pick up, t he Bank's credibility would be undermined.

In these circumstances, best to leave rates as they are and look to other instruments, such as the exchange rate and supply-side policies, to promote growth. The case for cutting interest rates in the euro zone may not be as strong as some economists would have us believe.

Dr Anthony Leddin is senior lecturer in economics in the University of Limerick.