ECB likely to raise rates next month

The euro's roller-coaster ride on the world's financial markets reinforced expectations among German analysts that the European Central Bank (ECB) will increase interest rates in March.

But most observers believe the central bankers will wait until the end of the month, when the ECB's governing council meets in Madrid, before they make their move.

The governing council meets twice every month but, until now, moves on interest rates have always come at the first meeting each month, which is followed by a press conference. The meeting on March 30th has been brought forward from early April to facilitate the temporary change of venue to Madrid.

"A decision made in Spain to raise interest rates would send a particularly strong signal to the markets because Spain's inflation rate of 2.9 per cent is one of the highest in the euro zone," according to Mr Gerhard Grebe from the private bank Julius Baer.

The January inflation figure for the euro zone, which will be announced today, is expected to show that inflation has risen above the ECB target of 2 per cent.

The fact that the ECB president, Mr Wim Duisenberg, left yesterday's meeting of EU finance ministers in Brussels without comment suggests that the governing council will leave interest rates unchanged when it meets in Frankfurt on Thursday.

Mr Duisenberg has made a point of preparing the financial markets for each interest rate change - although he first signalled this month's rise only a few days before the decision was made.

One argument against waiting until the end of March is that the ECB meeting comes just nine days after the US Federal Reserve is expected to increase rates. Mr Duisenberg had to endure taunts this month when the ECB appeared to follow meekly in the Fed's footsteps and the suspicion that the ECB is slavishly shadowing Mr Alan Greenspan's decisions does nothing to enhance the European central bankers' authority.

If the governing council does nothing on Thursday, Mr Duisenberg may have to do better than repeating his year-old mantra to the effect that the euro has the potential to appreciate.

The ECB president was repeating these words when the euro was worth $1.10 and as the currency continues to slide, they sound increasingly hollow.

Yesterday's decision by EU finance ministers to back Germany's nominee for the leadership of the International Monetary Fund (IMF), Mr Caio Koch-Weser, is evidence of the enhanced stature of the German chancellor, Mr Gerhard Schroder, among his international peers.

Mr Schroder has gained political advantage from the campaign funding scandal surrounding the opposition Christian Democrats but he is also reaping the benefit of his government's audacious budget cuts and ambitious tax reforms. As Europe's biggest economies boom, partly thanks to the weakness of the euro, politicians such as Mr Schroder are taking the credit.

But when the public feels anxious about the slide in the currency's value, it is Mr Duisenberg and his fellow central bankers who are increasingly getting the blame.