Inflation `must be seen in context of growth'

The Department of Finance has responded to the European Central Bank president's inflation warnings by identifying the economic and social achievements of the past decade as well as the Republic's high growth levels and low unemployment.

In a statement last night in response to Mr Wim Duisenberg's assertion in Dublin on Wednesday that the Government needs to act to curb inflation, the Department said the Government was doing just that.

"The president of the ECB has suggested that action must be taken. The Government agrees with that and has already implemented a range of measures."

The statement added that policy on inflation will be considered in the context of the forthcoming Budget and the Programme for Prosperity and Fairness.

It also pointed out that the inflation problem "must be seen in the context of extremely rapid growth and low unemployment compared to most of Europe". And it added: "In commenting on our current circumstances, commentators should bear in mind the economic and social achievements of the last decade."

But the outlook for inflation remained poor last night, as a marginal rise in the value of the euro against the dollar was undermined by continuing record oil prices in advance of a key meeting of OPEC this weekend.

Mr McCreevy and the other euro zone finance ministers, who meet in France today, may make a statement reinforcing the message that the euro is out of line with economic fundamentals. But it will not address any possible central bank intervention to prop up the currency.

The euro, which had earlier hit a lifetime low of $0.8637, clambered to $0.8750 on the news that euro zone governments could be co-ordinating action to reverse the currency's long decline.

According to Mr Oliver Mangan, economist at AIB, the main problem is that the low level of the euro and high oil prices could force the ECB to push up interest rates higher than they would otherwise, killing off any chance of domestic demand and consumer spending picking up in France and Germany.

German and French ministers rallied to the defence of the currency yesterday, insisting it is undervalued. German Finance Minister Mr Hans Eichel spoke with his French counterpart, Mr Laurent Fabius, by telephone and they agreed the euro's value on foreign exchange markets did not reflect Europe's economic strength, officials in Berlin and Paris said.

Mr Duisenberg notably refrained from mentioning the euro at all in a speech in Dublin on Wednesday.

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