The European Central Bank (ECB) came under fresh pressure to increase interest rates last night after its counterpart in Washington, the Federal Reserve, raised US rates by half a percentage point and indicated that further rises are on the way. There was little immediate reaction to the Fed's decision on the financial markets, which had expected the interest rate rise. But in a statement issued following their meeting, US central bankers hinted that the next interest rate rise could come sooner rather than later.
"Against the background of its long-term goals of price stability and sustainable economic growth and of the information already available, the committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future," the statement said.
Last night's increase took US interest rates to 6.5 per cent - almost 3 per cent higher than in the euro zone - and some analysts predict that the next US rate rise could come at the end of June.
The euro fell back against the dollar before the Fed announcement but stabilised around 90.5 cents afterwards and about 60.5p against sterling.
Analysts believe that one reason behind the euro's softening yesterday is the receding prospect of market intervention by the ECB to boost the currency.
The Bundesbank president, Mr Ernst Welteke, who is on the governing council of the ECB, told the German business daily Handelsblatt yesterday that there should be no intervention without the co-operation of the US.
"I don't expect a so-called concerted action," he said, adding that Washington was unlikely to agree to a devaluation of the dollar in the run-up to November's US presidential election.
The euro recovered from record lows last week amid rumours that the ECB was about to intervene in the markets. The ECB president, Mr Wim Duisenberg, declined to rule out such action but two of Mr Welteke's Bundesbank colleagues have spoken out against intervention this week.
Although the euro fell back against the dollar yesterday, it held on to gains against sterling, which has depreciated by about 7 per cent against the European currency in the past two weeks.
Britain's Trade and Industry Secretary, Mr Stephen Byers, said yesterday that sterling was still overvalued against the euro and predicted it would fall further in the coming weeks.
Many analysts believe that sterling will, in fact, lose more ground against the dollar than against the euro but the Northern Ireland Secretary, Mr Peter Mandelson, told a trade union conference in Belfast yesterday that Britain would be vulnerable to violent currency swings as long as it remained outside the euro zone.
"The fact is, that as long as we are outside the euro, there is little we can do to protect industry against destabilising swings in the value of sterling as they affect Europe - the largest market where we have to earn a living," he said.
One of Germany's leading economic think tanks, the DIW, said yesterday that it expected the ECB to raise interest rates further in the coming months, slowing economic growth.
