( AFP )- The European Central Bank will make a cut of sorts this week -- but with eurozone inflation stubbornly high the cut will be to its growth forecasts, not interest rates.
"The ECB council will cut on Thursday its forecasts for growth in the euro zone, but not its main interest rate," WestLB economist Holger Sandte said in predictions widely shared by other experts.
The US Federal Reserve has slashed interest rates in recent weeks in an effort to stave of a recession, and increasing signs of an economic slowdown in the euro zone are adding to pressure on the ECB to follow suit.
Further pessimism was generated on Friday with a sharper-than-feared decline in the European Commission's eurozone economic sentiment indicator to its lowest level in two years.
"What is a worry is the sharp collapse in eurozone economic confidence over the last year. This is consistent with eurozone growth dropping well below 2.0 pct this year, possibly to around 1.5 pct," Bear Stearns economist David Brown said.
"The ECB is now under huge moral pressure to cut rates especially with the euro on a surge towards 1.55 dollars."
Other confidence indicators have also weakened considerably, with the possible exception of the Ifo survey in Germany, the motor of the European economy, which has held up surprisingly well.
But another data release on Friday showed the dilemma that ECB head Jean-Claude Trichet faces -- that of stubbornly high inflation, something which a cut in interest rates could exacerbate.
Numbers from the European Union's Eurostat data agency showed that Eurozone inflation hit 3.2 percent in January, the highest level since the launch of the euro single currency in 1999.
The number was even worse than expected and was also well above the ECB's preferred level of of inflation of close to but less than 2.0 percent.
But the slowing growth and the strong euro -- which makes European exports more expensive -- is expected to dilute inflationary pressures, which in turn should allow the ECB to cut rates later this year, economists believe.
"Under these conditions, the ECB could start cutting interest rates in the spring" and gradually lower its main lending rate to three percent by the end of the year from four percent currently, BNP Paribas economist Clemente De Lucia said.
Indeed at the ECB's last rate-setting meeting in February Trichet indicated that he was more worried by growth prospects than by inflation, comments that were interpreted in the markets to mean that cuts in interest rates may not be far off.
New ECB forecasts for growth and inflation, which will also be released on Thursday, should give markets some clue as to when to expect the timing and magnitude of the cuts.
The ECB "could use the new set of forecasts ... to signal that a monetary easing is on the cards," Gilles Moec at Bank of America said.
WestLB, for instance, expects the central bank to trim its 2008 forecast to 1.8 percent from the current projection of 2.0 percent and for 2009 to 2.0 percent from 2.1 percent.
Although the ECB will probably increase its inflation forecasts, the increase will be small and possibly non-existent, further strengthening the case for interest rate cuts -- but not yet.