ECB hints next rate move may be up

Wim Duisenberg, president of the European Central Bank, stepped in to shore up the euro yesterday by dropping a broad hint that the next move in Euroland interest rates would be upwards.

With the single currency teetering close to parity with the dollar, Mr Duisenberg said a healthier outlook for growth meant that the ECB was leaning towards dearer borrowing in the future.

His comments, together with hedge-fund buying of the euro and weak US inflation figures, provided some much-needed breathing space for the single currency, which has fallen by 12% since its January launch. In late afternoon trading in Frankfurt it was up half a cent to $1.0240.

Analysts said that the still-fragile state of large chunks of the European economy meant that any increase in rates was still some way in the distance, and would probably not occur until next year. While some parts of the single-currency zone - such as France, the Netherlands, Spain and Ireland - are enjoying a period of either robust or rapid growth, figures from Italy yesterday showed industrial production down by 4.6% on the year and earlier this week Germany announced a rise in unemployment in June for the fourth successive month.

Nevertheless, the mere hint of dearer borrowing appeared to have the intended effect on the foreign exchange markets. Bond yields also leapt by a full point in the wake of the ECB president's remarks.

Speaking at the end of the ECB's bi-monthly meeting, at which rates were held at 2.5%, Mr Duisenberg said: "The prospects for a more broadly based and sustained recovery in the world economy have become stronger." He added that "a bias is gradually creeping into our considerations" toward increasing rates. "If money and credit growth increase further, a reassessment may be appropriate."

Many analysts believe the selling of the euro has been overdone in recent months, and that the currency has potential to rebound strongly once it becomes clear that the European economy is on the mend. Nick Parsons, currency strategist at Paribas Capital Markets, said: "They would only be hinting at that [higher rates] if they were confident about recovery. If higher rates are a function and consequence of higher growth, that would support the euro."

Mr Duisenberg's new mood of hawkishness appeared to be based on the potential for inflation stemming from an acceleration in Euroland's money-supply growth. The broad measure of money growth in the euro-11 region accelerated to a 5.3% annual rate in May from 5% in April, moving further away from the ECB's 4.5% target.

The ECB president said that while the acceleration in money supply was not "a threat to price stability at present," it could pose one at a later point.

"It is right to leave interest rates where they are at the moment,"' said Norbert Walter, chief economist at Deutsche Bank AG, the world's biggest bank. "When the economy recovers the rate rise will come, but this isn't on the agenda this year."

Consumer prices in the European single currency region rose 1% in the year to May, according to the most recent figures available from the EU statistics office, Eurostat. The ECB's aim is to keep inflation below 2%.