Investors were anxiously awaiting the press conference of Jean-Claude Trichet, ECB president, for new clues about the bank’s monetary policy. The interest rate futures market has started to contemplate the likelihood of a rate cut this year, although ECB has said its next move in rates would be upwards.

The 10-year German Bund yield slid to a record low of 3.211 per cent amid widespread uncertainty about the eurozone’s economic policy after both French and Dutch voters rejected the EU’s constitution in separate referendums. This is thougt to bode ill for economic growth, helping boost bond prices and leaving yields lower.

But UK gilt yields were slightly higher as investors braced from US labour market data on Friday. Ten-year gilts were yielding 0.6 basis points higher at 4.219 per cent – but still near their lowest levels since July 2003.

The ECB’s decision was widely expected amid mounting economic and political turmoil in the wake of the French and Dutch rejection of the proposed European Union constitution and a deteriorating growth environment.

Indeed both the Organisation for Economic Co-operation and Development and Germany’s Ifo Institute last week called on the ECB to cut rates to stimulate economic growth. Interest rate futures currently factor in a 15 per cent chance of a rate cut later this year.

The OECD’s call came after the Paris-bound organisation revised down its forecasts for eurozone growth in 2005 and 2006 to 1.2 per cent and 2 per cent respectively, from 1.9 and 2.5 per cent. The OECD called for a 50-basis point rate cut to address a “chronic pattern of weak resilience”.

The Munich-based Ifo Institute spoke out after reporting that German business confidence had fallen to a near two-year low, mirroring a fall in the ZEW measure of investor sentiment.

Wolfgang Clement, Germany’s economics and labour minister, and a number of Italian ministers, also supported calls for the ECB to cut rates from their current historic low. But few analysts believed the Bank would bow to pressure to cut rates this month, with Jean-Claude Trichet, the president of the ECB, having warned that a cut would backfire, undermining growth by raising inflationary expectations.

Mr Trichet has instead given the impression he would like to see eurozone rates rise as soon as the economic conditions allow. However, the economic picture emerging from the eurozone remains bleak.

The French economy expanded by just 0.2 per cent in the first quarter, while Italy fell into recession. Although data showed the German economy expanding by a healthy 1 per cent in the first quarter of 2005, most commentators believed this was flattered by one-off factors.

Furthermore core eurozone inflation has fallen to just 1.4 per cent, its lowest level since February 2001, with oil prices now off their highs and second round effects from high energy prices remaining muted.

However the 5.5 per cent slide in the euro to $1.226 against the dollar since the ECB’s last meeting may have done some of the Bank’s work for it. The weakening of the euro is stimulative to growth in the same way a rate cut would be, and, if it persists, is likely to be an upward drag on eurozone inflation.

The ECB has also fears the growth in M3 money supply, which remains around 6.5 per cent, is inconsistent with non-inflationary growth, while rises in house prices in many countries are a result of monetary policy that is already loose enough, the bank has argued.