Interest rate rise forecast in euro zone By David Litterick

THE European Central Bank could be forced into raising interest rates in the euro zone when it meets this Thursday, in order to prevent another collapse in the euro.

The struggling currency held firm last week, despite Denmark's referendum decision to keep its own currency. A massive intervention in the foreign exchanges by G7 central banks the week before was perfectly timed to limit the fallout from the Danes' decision. However, many currency analysts fear that unless the intervention is supported by a tightening of monetary policy, the euro could resume its slide.

Most are forecasting a quarter point rise in interest rates from 4.5pc to 4.75pc, sending the market a further signal that the euro will not be allowed to fall below 85 cents against the dollar. The ECB has issued notice of a press conference, usually taken as a sign that Wim Duisenberg, its president, has something to say and is considering a change in rates.

The ECB will also be under pressure to tighten policy as it is forecast to miss its inflation target of 2pc by a significant margin next year. The current rate is 2.4pc. The rise in inflation has been driven by the weak currency and high oil price. However, the decision for the ECB will be made more difficult by expectations that the economic recovery in the euro zone could be coming to end.

The German IFO economics institute confirmed yesterday that high oil prices were threatening to slow economic growth in Germany, underlining recent data showing a weakening of business sentiment in Europe's largest economy. The IFO said in a report that it expected the German economy to weaken as it suffered from lower world trade volumes.

A fall in German demand for consumer goods is also expected as a result of the high cost of oil. Each of the past three months has seen a fall in the IFO business climate index, historically an accurate forecast of future trends in the economy.

The organisation also called for restraint in German wage settlements, warning that a push for higher wages to compensate for high oil prices could lead to a wage-price spiral.

http://www.telegraph.co.uk/et?ac=000122257519214&rtmo=wAfQ0otb&atmo=rrrrrrfs&pg=/et/00/10/2/cnecb02.html

-- Carl Jenkins (Somewherepress@aol.com), October 02, 2000