Duisenberg and 16-man crew poised for their sixth increase in interest rates

When Mr Wim Duisenberg and his 16 colleagues on the Governing Council of the European Central Bank (ECB) meet at Frankfurt's Euro-tower tomorrow for the first time since their summer break, they are likely to increase interest rates for the sixth time since last November. Analysts are divided over whether rates will rise by 25 points or 50 points but most agree that some increase from the present level of 4.25 per cent is certain.

The ECB's resolve to raise interest rates will have been hardened by figures released yesterday by Germany's Federal Statistics Office showing that the German economy grew strongly in the three months to the end of June at an annual rate of 3.1 per cent. The news should ease fears, prompted last week by a sharp fall in the Ifo business climate index that the German recovery was peaking.

The central bankers have sound reasons for tightening, with euro zone inflation running at 2.4 per cent, well above the ECB's ceiling of 2 per cent and money supply growing faster than the bank's target rate of 4.5 per cent a year. But last week's anxiety over the German economy could serve as a warning to the central bankers that the euro zone's economic recovery may not be as robust as they had hoped.

Interest rates have risen by 1.75 per cent in the past 10 months as the ECB's analysts became convinced that sustained economic growth meant the euro zone could endure each new turn of the interest rate screw. To be sure, the signs that the euro zone's economy will grow by more than 3 per cent this year are welcome. But the achievement looks more modest when compared to the US economy, which has grown by more than 4 per cent for the past few years.

Mr Duisenberg will argue that the ECB's central role is to maintain price stability and that promoting economic growth is primarily the task of Europe's political leaders. But there is little evidence that increasing interest rates will counteract the two biggest causes of inflation at present - the rise in oil prices and the weakness of the euro against other currencies.

Previous interest rate rises have done nothing to boost the euro's value on foreign exchange markets and although ECB officials admit privately that they do not understand precisely why the currency is so weak, most outside analysts blame the difference in economic growth rates in Europe and the US. As the US economy continues to grow, a downturn in Europe created by excessively high interest rates would probably depress the euro further - fuelling the very inflation the ECB is trying to combat.

The central bankers are likely to ignore such fears tomorrow, arguing that a further rate rise - perhaps by as much as half a per cent - is justified by the economic data available to them. But they may calculate that, once they make their move tomorrow, it will be time to leave interest rates alone for a while.

The ECB does not wish to be seen to attempt to tweak the economy in response to each new shift in data, preferring to take substantial steps that have an impact over the medium term. But there is a second, political reason why the central bankers may tread carefully for fear of hindering the economic recovery in the euro zone.

ECB officials never tire of repeating that they are constitutionally obliged to resist political influence from any quarter and Europe's leading politicians are all formally committed to the independence of the central bank. And despite last month's suggestion by the French finance minister, Mr Laurent Fabius, that euro zone politicians could play a role in setting the ECB's inflation target, the bank's autonomy appears safe.

The ECB and Europe's politicians depend on one another, however, to pursue their economic aims and Mr Duisenberg has stated frequently that many of the most effective economic instruments remain in the hands of the politicians.

Germany's chancellor, Mr Gerhard Schroder, who is enjoying a surge of popularity halfway through his four-year term of office, knows that his fate at the next election rests on his success in cutting Germany's lengthy dole queues.

Just as Mr Duisenberg can make life difficult for Europe's politicians, the politicians can throw any number of spanners into the ECB's works. As the euro zone finance ministers prepare to meet in Versailles next week for a discussion on how to enhance their role, Mr Duisenberg and his colleagues in the Euro-tower have reason to consider their own, next move very carefully indeed.