Downsides more apparent to Euro Central Bank.

After raising interest rates in early July, the European Central Bank indicated that rates were unlikely to change further anytime soon, IIB Bank has said.

Following the ECB’s decision to maintain european interest rates at 4.25%, it seems that the ECB has become more concerned about the emerging slowdown in european growth. For this reason, IIB said that markets have priced out previous fears of a further interest rate increase and that market sentiment is beginning to contemplate what set of circumstances might bring rates lower.

IIB said that it would seem that the ECB has been taken by surprise by the speed of slowdown in recent Eurozone economic indicators. “Emerging weakness in activity has strengthened the hand of the ‘dovish’ camp within the Governing Council and substantially reduced the threat of a further rate rise in the months ahead. If oil prices continue to soften and activity weakens further, markets may begin to anticipate an early 2009 rate cut. However, it is likely that a significant number on the ECB Governing Council continue to see stubbornly high inflation as the dominant threat. So, the ECB is likely to strongly resist any build-up in optimism that borrowing costs could be set to fall.”