ECB interest rates left unchanged but rise due

The European Central Bank (ECB) left interest rates unchanged yesterday but its president, Mr Wim Duisenberg, indicated that the cost of borrowing would rise again soon - perhaps before the end of this month.

Speaking in Frankfurt after a meeting of the Bank's Governing Council, Mr Duisenberg expressed concern about the euro's poor performance on foreign exchange markets and denied that a weak currency was good for Europe's economy.

"A strong currency is in Europe's interest. The euro's foreign exchange rate remains a reason for concern and does not reflect the euro zone's underlying strength," he said.

But his words in support of the euro failed to lift the currency, which fell below $0.97 only hours after he had spoken.

Mr Duisenberg is concerned about the weakness of the euro, not only because it fuels inflation by making imports more expensive, but because of its effect on the currency's reputation.

Some analysts had expected interest rates to rise yesterday after the currency's slide on the foreign exchange markets this week. Mr Duisenberg left no doubt that, as the euro zone's economy continues to improve, interest rates would continue to rise.

"The balance of risks to price stability remains on the upside. The upside risk to price stability will need to be monitored continuously to ensure timely action," he said.

The ECB fears that the recent rise in oil prices - which are higher than they have been for nine years - could spill over into the consumer price index, thus fuelling inflation further. In this context, Mr Duisenberg expressed the hope that, when the Organisation of Petroleum Exporting Countries (OPEC) met later this month, it would agree to boost oil production.

"If oil supply increases, the upward movement on prices would be reversed and it could be a very welcome signal for us," he said.

Mr Duisenberg insisted that the economic outlook for the euro zone remained bright but he said that wage restraint and fiscal policy would play an important role in keeping inflation down. He blamed the weakness of the euro on the continued strong growth in the US economy, which has buoyed up the dollar.

European finance ministers are divided on how strong the euro should be. Germany's Mr Hans Eichel indicated he would like to see the currency rising soon, whereas his French counterpart would prefer the euro to appreciate in line with economic growth.

In Frankfurt yesterday, Mr Duisenberg left nobody in any doubt about his preference, or about his willingness to take the steps on interest rates he thinks necessary.

"There is no doubt what direction our monetary policy will go in the near future," he said.