By Stuart Williams

FRANKFURT (AFX) - The European Central Bank is expected to cut interest rates tomorrow after remarks by president Wim Duisenberg indicated the bank is now ready to respond to dwindling inflation risks in the euro zone, economists said.
They added Duisenberg's remarks have helped dispell fears the ECB would once again keep rates steady, even though the ECB's reputation for unpredictability makes the outcome of the governing council meeting still far from certain.
Duisenberg said in Brussels euro zone inflation will fall well below the 2 pct stability ceiling next year, and is "sure" the governing council will take this factor well into account when setting interest rates.
"I think that after what Duisenberg said there should be cut, even though that does not mean they will deliver one," said Julian von Landesberger, economist at HypoVereinsbank.
"But if they do not cut they are going to get a heavy bashing," he added.
The decision by the Federal Reserve to cut interest rates by an aggressive 50 basis points should also encourage the ECB, even though the bank firmly emphasises its independence from the Fed.
Economic data is also pointing firmly in the direction of a rate cut, which signals euro zone inflation is moderating rapidly and the economy is reeling from the effects of the Sept 11 US attacks, economists said.
Preliminary euro zone October inflation data published on Monday showed a rise of 2.4 pct year on year, moving ever closer into line with the ECB's stability ceiling of 2 pct.
"The continued fall in inflation should allow them (the ECB) to take the plunge ..., allowing an imminent rate cut this Thursday," said Merrill Lynch economist Sharda Dean.
October purchasing managers indicies (PMIs) for the euro zone fell dramatically to 42.9 from 45.9 in September, in the wake of a sharp fall for the German Ifo index of business confidence.
Euro zone industrial confidence also plunged in October to the lowest level since August 1996, while consumer confidence was the weakest since August 1997.
"The European economy is only creeping towards a recovery and inflation has already eased back significantly. This has given the ECB further scope for action, which it will most probably use with a 50 basis points cut," said Anja Hochberg at Credit Suisse.
M3 money supply growth, at 7.6 pct for September, has shot well above the ECB's reference value of 4.5 pct, but Duisenberg has consistently emphasised that there are currently no risks to price stability from this area.
With private sector credit moderating, economists believe this presents the ECB with no obstacle for a rate cut. "In practice M3 does not seem to play a large part in ECB decision making," said Merrill Lynch's Dean said.
In a survey of 34 economists by AFX News and Agence France Presse last week, all but one said they are expecting a rate cut from the ECB this Thursday. Some six economists forecast a 50 basis points easing, while 25 predict 25 basis points.
But many cautioned there is still a chance the ECB will risk the wrath of disappointed politicians and the fury of anxious markets by keeping rates unchanged on Nov 8.
Over the weekend, Bundesbank president Ernst Welteke had raised eyebrows when he said in a German newspaper interview further rate cuts could stoke up long-term inflation expectations by creating too much liquidity.
He also warned monetary policy is not able to bring around an economic turnaround and cannot strengthen the confidence of consumers and companies.
"I am always uncertain when it comes to the ECB," said Commerzbank economist Michael Schubert. "Duisenberg's comments support a rate cut but the remarks by Welteke certainly do not."
He said all the theoretical options of a hold, a 50 basis point cut and a 25 baiss point cut are possible outcomes on Thursday.
"The state of the economy would support a 50 basis point cut but the careful comments of the ECB do not suggest this," he said
Economists said the ECB could damage the euro zone economy if it underestimates the psychological boost a rate cut might give to consumer and investor sentiment in the area.
Some reports suggested certain national central bank chiefs were disappointed with the decision to keep rates unchanged at the last meeting and the hawkish tone of Duisenberg's subsequent news conference.
The ECB's insistence that the preservation of price stability is the best contribution it can make to growth could prove dangerous in recessionary times, economists added.
4Cast Analysis economist Gulliame Menuet said the ECB needs to do more for the sake of growth. "In our view the effect of a 25 basis points ease last time would have boosted sentiment by more than might be the case normally by maintaining momentum at a critical time," he said.
However euro zone finance ministers, who have made some highly explicit demands for rate cuts recently, have largely refrained from giving the ECB advice in the past week.
EU diplomats said ministers have now switched to a less confrontational approach, as it is now clear attempting to push the fiercely independent ECB towards a rate cut is counterproductive.
"Recent events have confirmed the rule that the more one talks publicly about a lowering of rates, the less happens in Frankfurt," an EU diplomat said.
Economists also believe the perceived interference from politicians discouraged the ECB from cutting rates last month, and the silence this time is a strong argument in favour of a rate cut.
"This gives the ECB more room to manoeuvre without risking their credentials as an independent central bank," said Merrill Lynch's Sharda Dean.