The European Central Bank is expected to hold its benchmark interest rate steady later Thursday as inflation fears outweigh the growing financial crisis.
The 15-nation euro zone is fighting high inflation, low growth and dim short-term prospects for more consumer and industrial demand as the global financial crisis unfolds.
But the bank could be prompted to cut its key rate from 4.25 percent – where it has stood since July – if the real threat of a recession raises its head in coming months, analysts said.
Howard Archer, the chief U.K. and European economist at Global Insight, noted "further deterioration" in euro-zone manufacturing coupled with preliminary figures showing inflation easing from 4.1 percent in August to 3.6 percent last month.
The economic picture "reinforces our growing belief that the ECB could cut interest rates from 4.25 percent to 4 percent before the end of 2008 as the heightened financial sector turmoil and very tight credit conditions heighten the danger of euro-zone recession," he said.
While a cut would bring the bank in line with its major peers, including the U.S. Federal Reserve, so far ECB president Jean-Claude Trichet has preferred to remain stalwart against inflation despite the uncertainty that has exploded in markets in the past three weeks.