The European Central Bank (ECB) is expected to cut interest rates when its governing council meets on Thursday. Most economists now expect the Bank to respond to slowing economic growth in euro-zone countries by cutting interest rates by a quarter of a percentage point to 4.25 per cent.

The ECB governing committee is meeting for the first time since August 2nd against a background of increasing concern about the sluggishness of economic activity in the euro zone, particularly in the larger economies of Germany and Italy. Volatile currency and equity markets are expecting a cut and there is a risk that the euro's recent gains in value could be reversed if the ECB does not act.

In the US, the Federal Reserve Bank has responded aggressively to sluggish US and global economic growth by cutting rates seven times since the beginning of the year.

The Fed has knocked 3 percentage points off interest rates to bring its current rate to 3.5 per cent. The ECB has cut rates once this year, in May. While the ECB rate was lower than the Fed rate at the start of the year its 4.5 per cent rate is now a full percentage point above the Fed rate.

IIB economist Mr Austin Hughes expects a quarter point rate cut this week.

"Essentially it would be difficult to avoid a cut. If it does not cut it would be very hard to say the environment had changed dramatically two weeks later and the clamour from business and politicians for a rate cut would intensify.

"Governors arriving for the meeting are all coming from domestic environments where rate cuts would be helpful. Comments from French Finance Minister Mr Laurent Fabius that he saw a pause in deficit reduction this year may worry the ECB that public spending and deficits could spiral in euro-zone countries if finance ministers feel they are being left on their own to cope with slowing growth," according to Mr Hughes.

"The euro has just had one of its best months while the ECB has been on holiday. If the financial markets see the ECB dithering or looking for inflation shadows it will be seen as out of touch and markets could decide to support growth in the euro zone through a lower euro", he said.

Bank of Ireland chief economist Dr Dan McLaughlin feels a rate reduction is well overdue. Up to August the ECB appeared to accept that growth was slowing but was confident that the euro zone would grow in line with its long-term sustainable target rate of 2.25 per cent, according to Dr McLaughlin.

"That is clearly not attainable now and the ECB seemed to accept implicitly in its August bulletin that the growth outlook was less benign than it had anticipated. The latest figures show the German economy had a flat second quarter while Italian growth fell and inflation is moving in the right direction. If you take in the backdrop of another cut in US rates and the Fed reference to world growth still slowing, it all adds up to an environment in which the ECB should cut", he said.

But chief economist with NCB Stockbrokers Dr Dermot O'Brien is sceptical that the ECB will move as early as this week. He feels a rate cut is warranted but feels it is more likely to come on September 13th than next week.

"Really it is anyone's guess what they will do. Most economists expect a move this week. But I am sceptical.

"A cut has been justified for some time but the ECB has shown no sign of being overly concerned about signs of slowing growth," he said.

"Their expressed concerns about inflation have less and less validity as rates fall throughout the euro zone. There is nothing to stop the ECB cutting rates," Dr O'Brien said.

"But its August report seemed to indicate that it considered growth rates were appropriate and there have been no signs since from members of the ECB governing council that it was getting ready to do anything.

"That being said though there were no signs in May either that it was going to cut rates. But I feel on balance that the ECB will want to get another set of inflation figures under its belt before it moves on interest rates".

On the size of the next ECB rate cut Dr O'Brien expects a quarter point reduction to 4.25 per cent. "There will be nothing more adventurous than a quarter point. There is no enthusiasm at the ECB for big cuts. It could be concerned that a big cut would undermine the euro recovery", he said.

The last ECB rate cut was in May when the rate was reduced by a quarter point to 4.5 per cent. It last cut by a half point in April 1999 - from 3 per cent to 2.5 per cent.

Between April 1999 and May 2001 the ECB rate increased in a number of moves to reach 4.75 per cent.

Dr O'Brien is not ruling out a half point cut.