The European Central Bank left interest rates unchanged as expected on Thursday despite the financial turmoil engulfing European banks and increased signs of weakness from the euro zone economy.
European Central Bank President Jean-Claude Trichet said the bank was determined to fight inflation but admitted there was a risk of economic slowdown.
"The most recent data clearly confirmed that economic activity in the euro area is weakening," Trichet told a news conference. "Upside risks to price stability have diminished somewhat but have not disappeared."
There is a growing belief that rate cuts are now inevitable, the only question is when. Since the ECB last met, gloomy economic data and a rise in unemployment have suggested a euro-zone recession is increasingly likely while inflation fears have been eased by further drops in oil and commodity prices.
"What we will see will be… lower rates, no later than the end of the year," Ansgar Belke from the University of Duisburg told CNBC.