The governing council of the European Central Bank (ECB) meets in Frankfurt today amid mounting speculation that interest rates for the euro zone will be cut for the first time since the currency was introduced on January 1st.
Most German economists surveyed by the Reuters news agency this week predicted a cut of 0.25 per cent, bringing rates down to 2.75 per cent.
Low inflation and sluggish growth in Germany and France, the two largest economies in the euro zone, are the most commonly cited grounds for a cut. But most observers agree that the resignation of Mr Oskar Lafontaine as Germany's finance minister has given the ECB more room for manoeuvre on interest rates.
Mr Lafontaine's successor, Mr Hans Eichel, held a cordial meeting with the Bank's president, Mr Wim Duisenberg, this week. He is expected to take a more conciliatory approach to the ECB and to refrain from making public calls for interest rate cuts.
"I expect a cut of 25 basis points because a reduction is justified from the point of view of economic growth, because there is no danger of inflation and because the exchange rate does not appear to be an impediment," said Mr Hans-Juergen Meltzer of Deutsche Bank Research in Frankfurt.
The value of the euro against the dollar has plummeted from a high of $1.18 in January to $1.07 this week. But economists say the downward trend has several causes, including the unexpectedly robust state of the United States economy and the impact of the armed conflict in Kosovo.
A cut of 0.25 per cent may be too small to have a significant impact on economic growth in Germany and France, but it would send a strong signal that the ECB is prepared to respond to economic developments in the euro zone.
A minority of economists believes the ECB will wait until later in the year to cut rates, not least because the euro's fall in value is already stimulating growth.
Mr Jochen Schober of the Hessische Landesbank in Frankfurt predicts that, after examining the economic environment in the entire euro zone, the ECB will decide against a cut.
"Economic growth is lower than expected. That is a reason to cut. But the euro is not so stable that it can afford to be damaged further by a cut in interest rates. The devaluation of the euro is pushing prices upwards. Monetary policy is relatively expansive and could produce higher inflation in the coming year. Together with paralysed growth, this could produce the worst of all possible worlds," he said.
