The euro fell against the dollar and sterling yesterday after the European Central Bank (ECB) left interest rates unchanged at 4.75 per cent. The markets were clearly disappointed at the ECB's failure to act but most analysts remain convinced the central bankers will cut rates next month.

The ECB is the only major central bank that has yet to cut interest rates this year. If the Bank's governing council cuts rates at its next meeting on April 11th, it will be the first interest rate reduction in the euro zone for two years.

Euro-zone inflation remains above the ECB's target of 2 per cent and, although money supply growth is slowing, it remains too high for the central bankers' liking.

The ECB's governing council has given conflicting signals about its intentions in recent weeks. Some central bankers hinted that slowing growth and falling inflation justified a cut in interest rates. But others, including the Bundesbank president, Mr Ernst Welteke, suggested a move would be premature.

The euro closed last night at $0.8827 and 61.53p sterling. Dr Dan McLaughlin, chief economist at Bank of Ireland, said the key was whether the currency fell below 88 US cents. If that happened, the danger was that it would find a new lower range close to its previous lows.

He said an expected cut next month would push the currency up, not down. Dr McLaughlin argued for a half percentage point cut when rates were lowered. "It would be much better for the ECB to cut rates by half a percentage point in one go than to be seen to spread the cuts in quarter-point increments," he said.