ECB expected to hold interest rates as surging euro cuts inflation threat

The European Central Bank can afford to hold key interest rates steady for now as the rising euro helps keep a lid on inflation, Belgium's Finance Minister Mr Didier Reynders has said.

"At the moment I'm sure that we have a good monetary policy without any need to change, because of the exchange rate of the euro, and so it's a good impact on the inflation," Mr Reynders said.

"With the evolution in the exchange rate of the euro, decreasing the cost of oil for the European Union, it must be possible to stay on hold at the moment," he added.

The ECB meets on Thursday but is widely expected to leave its key benchmark rate unchanged at 3.25 per cent for the eighth month running, largely due to the surging euro.

"The ECB has little need to push up rates just yet as falling equity markets are adding to the uncertainty of the economic recovery ... and as strength in the euro dampens inflationary pressure," said European economist Mr James Carrick from ABN Amro in London.

Asked if he was worried that the stronger euro could hurt exports, Mr Reynders said that for the moment, the benefits from cheaper oil, which is priced in dollars, were balancing any negative impact on exports.

But it was important that movements in the euro continued to be slow and orderly, he said.

"With such an evolution as now, with a slow evolution, perhaps to parity, we will see it is not a problem for us," he said.

The euro touched 99.90 cents against the dollar on Friday, its highest since February 2000, before later easing back to 99 cents.

The minister added that it was important that European Union countries stuck to a budget agreement hammered out in Madrid earlier this month to bring state finances into virtual balance by 2004.

"We need to stay on hold with the growth and stability pact," he said, adding that any weakening in commitment would undermine the confidence of the markets and the general public.

"It was a promise, so it's not only a problem for budgetary policy," he said.