The European Central Bank (ECB) is under massive pressure to raise interest rates today in an attempt to halt the euro's nosedive on foreign exchange markets. But as European political leaders attempted to talk up the currency yesterday, a member of the ECB's Governing Council hinted that the central bankers may defy analysts' expectations by leaving rates alone.
Mr Klaus Liebscher, governor of Austria's central bank, acknowledged that Europe's central bankers are concerned about the fall in the euro's value, but insisted that they were watching developments calmly.
"We are a group of sensible people who should not panic - that will achieve nothing," he said.
The ECB president, Mr Wim Duisenberg, has admitted that the Governing Council postponed last month's interest rate increase by two weeks in order to avoid the appearance of panicking in the face of movements in the financial markets. He has frequently stressed that decisions on interest rates cannot be based on a single factor such as the exchange rate and is reluctant to be seen to be bullied into action by currency traders.
Most analysts, however, expect interest rates to rise today by 0.25 per cent to 3.75 per cent, and one of the German government's top economic advisers yesterday called for such a move.
Professor Horst Siebert predicted that the ECB would increase rates to guard against the danger of higher inflation caused by the weak euro.
"I expect a further increase in short-term interest rates and would advise the ECB to take such a step," he said.
Such a move is unlikely to halt the euro's decline and some analysts believe that the currency could fall below the psychologically significant figure of $0.90 before the trend turns.
The continuing weakness of the euro, which has lost more than 20 per cent of its value against the dollar since its launch last year, has left the ECB members feeling unhappy and bewildered. The bank's monetary policy strategists acknowledge that there is little they can do to halt the decline in the short term and that repeating their mantra that the currency is undervalued is a strategy that has failed.
French finance minister Mr Laurent Fabius underlined this yesterday when he said the weak euro "risks leading the central bank authorities to lift their rates, something I hope they will not do".
The euro had recovered to $0.9240 late in Europe yesterday, from a low point in New York the previous night of $0.9167. It also rallied against sterling, to 58.58p from a low of 58.17p earlier in the morning. The ECB is sceptical about the efficacy of intervening unilaterally in the markets and the United States is unlikely to agree to any concerted action to boost the value of the euro.
Although the euro's weakness is a source of embarrassment to Europe's central bankers, it is enhancing growth in the euro zone by making exports more competitive. Analysts fear that this temporary advantage could persuade some European governments that structural reforms are no longer necessary. Some believe the slowness of such reforms is one reason why investors are steering clear of the euro.
Chancellor Gerhard Schroder yesterday denied that Europe's leaders favoured a weak currency and promised to press ahead with budget reforms that would serve to strengthen the euro.
"Germany is interested in a strong euro and assumes that the strength will come from the internal strength of the euro zone economies. I'm sure the markets will come to another interpretation and that is what I expect," he said.
