Interest rates 'to be cut in EU but held in UK

The surging euro may force the European Central Bank to cut rates on Thursday, say economists. But the Bank of England, which also holds its monthly interest rate-setting meeting on Thursday, is expected to keep rates on hold.

Most independent analysts had assumed the Frankfurt-based central bank would also hold rates. But the euro/dollar rate - which nearly breached a record $1.30 last month - has changed the equation by holding inflation down across the 11-nation bloc. 'We maintain that the ECB will cut rates on Thursday because of concerns about growth,' said Lehman Brothers European economist Klaus Baader.

On Friday night German Chancellor Gerhard Schröder raised concerns about the strength of the euro with US President George Bush. Markets speculated that the ECB would feel pressure to cut rates to help the euro depreciate, particularly as the latest figures showed eurozone inflation at 1.6 per cent, well below the 2 per cent target.

Baader believes that Thursday's ECB meeting could mark a new style of monetary policy. Under the new ECB president, Jean-Claude Trichet, the European bank has begun paying greater attention to forecasts, moving it closer to the practice of the Bank of England.

The Bank of England is expected to hold off on further rate rises until May. Only one of 45 economists polled by Reuters predicts a rate rise on Thursday.