ECB pegs rates even as euro wilts

The European Central Bank yesterday shrugged off political pressures and mixed signals about the outlook for the European economy by keeping interest rates on hold.

The decision to leave rates at 3 per cent came at the end of another miserable day for the euro, which has lost almost 10 per cent of its value against the dollar since it was first traded on January 4.

The ECB's stance is likely to infuriate German finance minister Oskar Lafontaine, who made it clear before the meeting that the ECB should cut rates.

The decision is likely also to exacerbate already strained relations with US policy-makers who are concerned that Europe, along with Japan, is not doing enough to help keep the global economy moving forward.

At a press conference after the ECB council meeting, Bank president Wim Duisenberg hit back at Mr Lafontaine, saying the bank had heard more loudly from the German finance minister through the media than directly.

In a more oblique criticism of Mr Lafontaine and his French counterpart, Dominique Strauss-Kahn, who has supported calls for lower rates, Mr Duisenberg said: 'We are doing our utmost to underscore the confidence that the world has in this new currency; we hope that the politicians will help us in this effort of confidence-building.'

While the ECB was leaving Euroland's interest rates on hold, Brazil's new central bank chief, Arminio Fraga, marked his first day in the job by hoisting interest rates from 39 per cent to 45 per cent.

Although the euro has fallen from around $1.18 to its present level of $1.0792, Mr Duisenberg argued that this decline was a reflection of the strength of the dollar rather than euro weakness, and he dismissed suggestions of intervention to support the single currency as 'just rumours' and 'not factual'.

Mr Duisenberg acknowledged that economic activity in the euro zone appeared to have been slowing, and warned that higher-than-expected wage deals might have contributed to weaker business confidence.

Ahead of the meeting Mr Lafontaine had drawn attention to the strong performance of the US economy, which had been pulled out of the doldrums in 1992 by a mixture of lower real interest rates and an expansive budgetary policy.

His concerns were underlined by official figures which showed that the German economy contracted by 0.4 per cent in the final quarter of last year - its first fall in three years.