German industrialists disappointed at the lack of a rate cut this week need look no further than their own Finance Minister, Mr Oskar Lafontaine, who is said to be almost single-handedly responsible for the fact that interest rates were not cut in Frankfurt yesterday. It appears that there was an agreement in the ECB to cut interest rates, but that it came unstuck after the German finance ministry - and Mr Lafontaine in particular - began to turn on renewed pressure for a rate cut last month.

Subsequent pressure from the G7 meeting is said to have only hardened attitudes with the ECB, now determined not to react to anything which could conceivably be thought of as political pressure whether from Germany or indeed the US. They are now said to be convinced that the best way to secure their reputations is by resisting the pressure for a rate cut, until the economic data make it obvious that a cut is required.

So far the data coming from Germany would normally have been enough to spark a rate cut, but in current circumstances a few more weeks of negative data will probably be needed to change the central bankers' minds; although the economic situation in the main continental economies will eventually be used as the prime reason for the next cut. Resisting the pressure when Europe is threatened with deflation - with both German and French inflation running at only 0.2 per cent - must have been difficult and there is probably only so long that the bankers can set their faces against the numbers.

One problem is that the ECB is not even sure whether the threat of deflation - a destabilising period of a general falling price level - is a real one. Despite serious efforts, there is still little reliable pan-European data and the ECB appears to be mostly reliant on harmonised inflation figures and confidence surveys. The harmonised figures do not always give the most accurate picture of inflationary pressures in an economy while the confidence surveys often tell very different stories. German consumers, for example, are still not despondent, while business has not recently been more pessimistic.

As some commentators have pointed out recently, because of the poor data base the ECB does not even know for sure how much the euro has depreciated on a trade-weighted basis since January 1st. This only serves to underline its reluctance to cut rates.

The ECB is now caught in a position of not being sure whether the main euro zone economies are sliding into recession, although on balance they still do not believe that they are. News that French consumers are spending record amounts has been seized on by some officials to show that interest rate cuts are not needed, as growth is likely to pick up gain over the coming months. Even the French finance minister, Mr Dominique Strauss-Kahn, has described the slowdown in the last three months of 1998 as an "air-pocket".

Against this background, it now seems that only another unequivocal slew of negative economic data will force an interest-rate cut - and then probably only if the euro has turned the corner on the international financial markets and is showing some signs of recovery.

The ECB is still said to be sensitive about last week's G7 meeting, when it was put under enormous pressure from the US officials. It is privately insisting that the risks to the US economy may be more serious; that is why the US officials are so determined to get Europe growing again, it says.

Another reason for ECB reluctance to cut interest rates is that news has leaked out that the December 3rd rate cut resulted from a Franco-German agreement made by Mr Lafontaine and Mr Strauss-Kahn with their respective central bank governors in late October 1988. This pre-agreement was reportedly presented to other finance ministers and ECB president, Mr Wim Duisenberg, in the euro-11 council on November 23rd.

The deal was that Bonn and Paris would stay on track with the Stability Plan narrowing of government budgetary deficits, if Mr Duisenberg would give his backing for an interest-rate cut among future euro partners in December 1998. Thus Bonn and Paris presented the euro partners with a fait accompli.

Now Bonn officials have decided that economic conditions have weakened still further. But this time its problem is that Germany is under-performing the rest of the euro zone. Ironically, Germany has found itself bound into monetary conditions which are too tight for itself, but appropriate for most of its euro partners. This is exactly the reverse of the situation which the authorities in many of the peripheral countries, particularly the Republic, feared they would be if monetary policy slavishly followed the needs of Germany.

In any case the decline in the value of the euro on the foreign exchange markets - which represents an easing of monetary conditions and should help boost exports from the euro economies - has bought the central bankers some time. The euro dipped below $1.09 this week and many believe that it now on the path to $1.05. Quite where the ECB will choose to intervene in the markets to try to stem its decline is not clear, but most assume it cannot let the euro come that close to parity before beginning to intervene.

Nevertheless an interest-rate cut over the next month remains likely, with the ECB reckoning that this would be preferable to allowing the governments the freedom to start down the road of fiscal expansion of tax cuts and spending increases. However, it is unlikely this will be sanctioned until the decline of the euro against the dollar has at least begun to be reversed.