ECB puts rate rise on hold

Frankfurt policymakers left eurozone interest rates on hold yesterday but signalled that they are poised to raise them in the months ahead as the economic recovery takes hold.

European Central Bank president Wim Duisenberg told a press conference that it was too early to respond to signs of economic recovery with higher borrowing costs, but admitted that the inflation picture in the 12-member single currency zone had deteriorated.

"The risks have moved in an upward direction," Mr Duisenberg said in Frankfurt. "But we need more information, more data, to come to our ultimate judgment ... The economic outlook is still subject to uncertainty."

Cyril Beuzit of BNP Paribas said: "This kind of speech is in line with a rate hike over the summer, either in July, or more probably, later."

Eurozone interest rates have been on hold since November, after the ECB joined other central banks in a concerted round of rate cuts to stave off global recession.

Economists said the rise in the value of the euro - which has gained 10% against the dollar since the beginning of February and hit a fresh two-and-a-half year high against sterling yesterday - was probably one factor in the ECB's decision to wait and see.

Graham Turner of GFC Economics said: "The strengthening of the single currency promises to put considerable downward pressure on inflation at a time when prices are already easing back following the euro-related spike at the turn of the year [when prices were rounded up on the introduction of euro notes and coins]."

Mr Duisenberg admitted that the stronger euro would help keep the lid on price rises in the near term.

"In recent weeks the exchange rate of the euro has appreciated. This will continue to contain inflation pressures and that is welcome, but it is still too early to assess the impact of exchange rate developments on the outlook for prices."

News that German factory orders expanded by 2.3% in April boosted hopes yesterday for an early recovery in the eurozone economy. The ECB has said it expects growth in the single currency zone to recover to 2-2.5% by the end of this year, but it will issue new forecasts next week.