Germany's Finance Minister, Mr Hans Eichel, has urged the European Central Bank (ECB) to keep interest rates at their present level, despite a leap in German inflation to a two-year high. Presenting his government's Annual Economic Report in Berlin yesterday, Mr Eichel said that his forecast of 2.5 per cent growth in Germany this year was based on the assumption that interest rates would remain at their present level despite the rise in inflation.

"We are sending quite a clear signal from Germany that there should be no monetary policy reaction," he said.

Most analysts expect the ECB to increase interest rates by half a percentage point during the first quarter of this year, probably on March 2nd. But Mr Eichel argued that, because the recent rise in inflation is mainly due to a temporary rise in oil prices, there is little danger that inflation in the euro zone as a whole will approach the ECB's ceiling of 2 per cent.

He predicted that German inflation, which hit 1.7 per cent this month, will average below 1 per cent for 2000 as a whole.

The ECB President, Mr Wim Duisenberg, has acknowledged that inflation will rise temporarily in the early part of the year but he has also signalled that interest rates are on an upward trend. With economic growth looking robust throughout the euro zone, the ECB may feel confident that there is little danger in raising rates.

Mr Eichel was relaxed about the euro's low exchange rate against the dollar and predicted that the currency would recover during the course of the year.

"The rate of the euro is all right. It would be a problem if, because of an externally weak euro, inflation in the domestic market was. But we are not reckoning on the external value of the euro leading to us having a stronger inflation rate in the internal market," he said.