"The persistently high inflation rates - despite recent declines - and the existing risks to price stability do not bode well for a rate cut, while the downturn in most sentiment indicators and real economic data over the past week suggests a rate hike is out of the question," Helaba economists said in a research note.

As a result, the Helaba economists suggested the ECB will take a "wait-and-see" stance for the near future.

Echoing the notion that the ECB would more likely wait than move preemptively, Commerzbank economist Michael Schubert highlighted the current tensions in the money market and the ECB's uncertainty regarding the impact to the real economy.

"ECB representatives are evidently increasingly concerned about the situation," Schubert said.

"(ECB Executive Board member) Lorenzo Bini Smaghi stated that the banks were pricing in a risk that does not exist at all in ECB refinancing operations when deciding on bidding rates. And (Bank of France Governor) Christian Noyer said that the ECB first had to gain a more precise understanding itself of the latest rise in Euribor rates before countermeasures could be taken," Schubert concluded, referring to the wider-than-normal spread between the unsecured Euribor and a proxy for a secured rate.

"It is all but certain that on Thursday, Trichet & Co. will play another round of the waiting game, as the ECB remains caught in a balancing act between the strong short-term upward pressure on inflation and the lingering threat of second-round effects on the one hand and the possibility of a sharp economic slowdown on the other hand, that would dampen inflationary pressures further out," ING Wholesale Banking senior economist Martin van Vliet said.

Emphasizing the possible division within the Governing Council with members like Axel Weber and Klaus Liebscher suggesting that the current policy rate may be insufficient, van Vliet speculated that this month's Council meeting would be heated.

"However, anything other than sticking to a wait-and-see approach in the upcoming few months would be a surprise," van Vliet said.

"We think the end game will be a modest 50bp easing in euro zone interest rates, when inflation prospects improve and concerns about the possibility of a protracted economic downturn gain the upper hand within the Council," van Vliet concluded, suggesting that the first rate cut could come early in the fourth quarter of 2008.

"The ECB is likely to keep talking tough on inflation at next Thursday's policy meeting, and interest rate cuts are likely to remain off the bank's agenda for several months to come," Global Insight chief European economist Howard Archer said.

However, Archer highlighted decreasing euro zone economic sentiment as well as moderating economic activity due to a longer-than-expected credit crunch and a growth-dampening euro, adding that these factors may weaken inflation worries and shift the ECB's focus towards economic growth, possibly leading to rate cuts before the end of 2008.

"However, September now seems the very earliest that interest rates will be cut, and the ECB could well hold off from acting beyond then," Archer concluded.

By Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it