ECB upbeat on euro stability

The president of the European Central Bank (ECB), Mr Wim Duisenberg, yesterday brushed aside concerns about the fall in the value of the euro against sterling and cited the new currency's recent rise against the dollar as evidence of its stability.

"I am not concerned. I have seen with some appreciation the recent appreciation of the euro," he said.

Mr Duisenberg was speaking in Frankfurt after a meeting of the governing council of the ECB left interest rates for the euro area unchanged at 2.5 per cent.

The value of the currency has risen from $1.0550 last week to $1.0780 yesterday. But it has continued to fall against sterling, making imports more expensive for many Irish companies. The euro closed at 65.90p against sterling yesterday, leaving the pound at 83.45p against the British currency.

The dollar weakened on the the back of comments by Mr Duisenberg's US counterpart, Mr Alan Greenspan, who warned yesterday that tight labour markets could result in a pick-up in inflation.

Talk that a resolution to the Kosovo crisis may be in view also strengthened the euro slightly. However, Mr Jim Power, chief economist at Bank of Ireland, said the reprieve would only be temporary. "Even if the war ends, the euro may rally to $1.10 but it will quickly be sold back to $1.05," he said.

Mr Duisenberg also denied rumours yesterday that the ECB intervened in the financial markets in recent days to prop up the value of the euro. But he conceded that the bank was concerned to ensure that the currency did not slide too far against the dollar.

"We do regard the exchange rate as one of the main indicators we follow of price stability over the medium term," he said.

Mr Duisenberg painted a generally benign picture of the medium-term economic prospects for the euro zone, despite a decline in industrial production at the start of this year.

"As regards the evolution of the world economy, recent developments tend to confirm the picture of a mild overall improvement in the external environment beyond the euro area. As before, however, the main features range from continuously strong growth of the US economy to continuously weak output in Japan," he said.

The governing council noted that the lower effective exchange rate of the euro in recent months, along with a rise in oil and food prices, had led to some upward pressure on prices. But it concluded that the general outlook for price stability remained favourable, with no significant threat of inflation.

The bank's calculations could be thrown into disarray, however, by the cost of NATO's campaign against Yugoslavia, much of which is being shouldered by states within the euro area. Mr Duisenberg conceded that the conflict could prevent some governments from reaching their budget targets but he declined to predict how severe the damage might be.

"It is too early to assess the impact of a conflict that has not yet ended on future budgetary developments. For the time being, we do not think it should or will have a significant impact," he said.