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European Central Bank council member Michael Bonello said the economic impact of the credit crunch is difficult to predict and policymakers will take a "prudent approach" when weighing the need for lower interest rates.

We will be assessing the information as it comes in and take a decision at the next meeting after due deliberation," Bonello, who heads Malta's central bank, said. "Particularly in these uncertain times, that is the most prudent approach to take."

Investors raised bets on the ECB cutting rates as soon as next month after president Jean-Claude Trichet on Thursday said inflation pressures are diminishing as economic growth slows.

The financial crisis is intensifying in Europe, with governments forced to bail out banks and guarantee consumers' deposits after credit costs soared to records.

Major efforts are being made to mitigate the impact of the financial turmoil on the real economy, but you have various elements at play in different countries and what the overall impact is going to be at the end of the day is unpredictable," Bonello said. "There are several indications that the tempo of activity is slowing down but we have to wait for the [domestic product] number for the third quarter to know exactly the extent of this weakening."

The economy of the 15 countries sharing the euro contracted 0.2 per cent in the second and third-quarter GDP figures are due on November 14. The ECB will publish new growth and inflation forecasts in December.

The central bank last week left its benchmark interest rate at 4.25 per cent, a seven year high. Investors have priced in a reduction to 4 per cent by December.

The world's biggest financial institutions have recorded almost US$600 billion (Bt20.64 billion) in write downs and losses tied to the United States mortgage market since the start of last year, driving Lehman brothers Holdings into bankruptcy on September 15 and forcing governments to rescue banks in the US, UK and Europe. Bonello, who declined to comment on specific bail-outs, said the measures are "designed to restore confidence".

The ECB has held off cutting rates because of its concern that the jump in inflation will become entrenched through a wage-price spiral as workers seek compensation for the higher cost of living.

While inflation in Europe last month slowed to 3.6 per cent after crude-oil prices retreated from a July record of $147.27 a barrel, it is still above the ECB's 2-per-cent limit. Trichet last week said inflation risks have "not disappeared".

Bonello said, "The Governing Council has repeatedly warned that second- round effects risk setting off a wage-price spiral.

BLOOMBERG