ECONOMICS: Interest rates in Ireland are likely to fall further in the coming weeks, with speculation growing that the European Central Bank (ECB) will trim its refinancing rate in June.

A quarter-point cut is now widely expected, although there must be a good chance of a half- point cut in rates, taking the repo rate to 2 per cent, the lowest in the Central Bank's short history.

From an Irish perspective, even a quarter-point cut to 2.25 per cent would take official rates here to levels not seen since the days when Moses was a boy (the 1940s to be more precise).

Whether the ECB changes policy in June or waits until July remains to be seen, but it does appear that the Bank is changing and evolving in its approach to monetary policy. This implies that it has taken to heart some, if not all, the criticisms thrown at it since its birth in 1998.

In those days it clearly reflected its Bundesbank roots, being closely modelled on the German Central Bank it was replacing as the guardian of the European price level.

It met every two weeks, as per the Bundesbank, and put great weight on trends in the money supply as a reliable predictor of future trends in inflation.

The European Central Bank also inherited the Bundesbank's predilection for secrecy - central banking as practised by high priests in a temple away from the prying eyes of the public - and minutes of the meetings were not released, although a small bow was made in the direction of transparency via the use of a post-meeting press conference.

It differed from the German Central Bank by defining its goal of price stability (the US Federal Reserve has also always refused to be tied down to a target) as an inflation rate below 2 per cent.

This struck most observers as being both restrictive and asymmetrical: an inflation rate of minus 2 per cent is consistent with the target but probably not desirable, as it would no doubt be accompanied by recession.

Things are different now, on a number of fronts. The governing council of the ECB still meets every two weeks, but monetary policy changes are only announced at the first meeting of the month.

This brings it more into line with its peers; the Fed meets every six weeks and the Bank of England monthly.

The ECB also now publishes economic projections, in June and December, albeit couched in terms of broad ranges, which does provide some indication of how it expects the world to unfold.

The money supply (which incidentally is growing strongly and would argue against lower rates) is also being downgraded as a policy indicator, because it is believed that the main monetary aggregates are being distorted as investors reject equities in favour of cash and other liquid assets.

The most important change, however, relates to their definition of price stability, a change announced earlier this month.

The ECB is still seeking to keep inflation below 2 per cent, but also near to that figure, which implies that inflation of 1.5 per cent or below is now not acceptable, as it flirts with deflation.

So inflation can now be too low using this new definition, which brings the ECB nearer to the Bank of England's target, which is to keep inflation at 2.5 per cent, no more and no less.

The significance of the modified target will become clearer in June with the publication of the ECB's latest forecasts for growth and inflation, which should reveal revisions to the forecast, including an expectation of lower inflation next year.

Last December the Bank was expecting inflation to lie within a range of 1-2.2 per cent in 2004, implying an average of 1.6 per cent.

GDP growth this year will now be lower than they expected, following the surprise fall in German output in the first quarter of the year, which of itself might impart a downward bias to the 2004 inflation forecast.

In addition, oil prices have fallen following the end of the war in Iraq which again should feed into falling energy prices, but the key change is likely to come from the euro's appreciation.

The ECB's published economic models show that a 10 per cent appreciation of the euro (the actual change since December) could lead to a 1 per cent fall in inflation over a 12-month horizon.

On that basis, it would be surprising if the ECB's upcoming inflation forecast for 2004 did not encompass a much lower figure than its previous 1.6 per cent, perhaps averaging nearer 1 per cent or below.

Under normal circumstances, this might have been enough to trigger a rate cut anyway, but in these times of heightened fears of deflation, it increases the chances of a half-point reduction in euro interest rates.

A sharp rally in the dollar or a spike higher in oil prices over the next few weeks may cloud the issue, but another monetary easing looks a virtual certainty.

Dr Dan McLaughlin is chief economist at Bank of Ireland