ECB dashes hope of rate cut

A defiant European Central Bank yesterday ended hopes that a weekend of arm twisting by US and Japanese policymakers had softened its determination to keep interest rates on hold.

Jean-Claude Trichet, governor of the Bank of France and a member of the ECB's governing council, insisted that the bank had to remain on guard against the dangers of inflation. "There is a slowing down of external demand triggered by the slowing down of the US economy but continued vigilance is appropriate due in particular to the evolution of wages and salaries," he said.

Inflation in the eurozone is currently running at 2.6% - well above the ECB's 2% ceiling - and the bank is worried that this will trigger high pay demands.

Its uncompromising stance was reinforced yesterday by a sharp rise in the money supply in the eurozone - data which the bank sees as a good guide to the future path of inflation.

M3, the broad measure of money supply, accelerated to 5% in March from 4.7% the previous month. Analysts blamed investors fleeing tumbling equity markets for the haven of bank accounts for the jump.

The money supply numbers had been taken into account when the ECB met last week but Bundesbank president Ernst Welteke noted: "This underlines that we in the ECB were on the right track when we decided not to reduce interest rates too early. The current eurozone inflation data and the M3 numbers confirm the ECB's 'on-hold' policy [on interest rates]."

Responding to calls from the IMF for lower euroland rates Welteke commented: "This is one voice that we hear but it is good that we are independent and we have decided on our own assessments."

In London the FTSE 100 share index was up 15.5 at 5996.9, while the Frankfurt and Paris stock markets were each up by more than 1%.