Euro bank faces rising pressure to cut interest rates

The European Central Bank is coming under mounting pressure to cut interest rates at its key Governing Council meeting in Frankfurt this week as it prepares to roll out euro notes and coins. Financial markets have priced in a 25 basis point cut.

German growth was stagnant in the second quarter of this year, and France's monthly unemployment figure is expected to increase for only the second time in three years this week.

The strength of the euro against the dollar, and moderation in headline inflation, offers the central bank scope to cut the rate by 25 basis points at either of the next two meetings.

'The August Monthly Bulletin and [Chief economist] Otmar Issing's latest interviews seemed to suggest that inflation risks have diminished and growth concerns intensified since the last meeting,' says Holger Fahrinhrug, an economist at UBS Warburg in Frankfurt.

One poll last week showed 41 of 55 economists believe the ECB will cut rates on Thursday. Some economists believe that a substantial fall in the central bank's inflation forecast will persuade the Governing Council to follow the example of the Federal Reserve and cut base rates.

Following Thursday's meeting, there will be a showpiece launch of the final design of euro notes and coins and the launch of the bank's final public information campaign.

There was speculation in Frankfurt that the meeting may finally clarify the 'gentleman's agreement' between France and Germany about bank president Wim Duisenberg standing down in favour of Jean-Claude Trichet, the Governor of the Banque de France, after the introduction of notes and coins. Trichet has since been caught up in the inquiry into the collapse of Credit Lyonnais.