The prospect of a rise in interest rates as early as next week drew closer yesterday as the euro remained near record lows despite evidence of rising business confidence in Europe's biggest economy.
The ECB hinted last night that another interest-rate hike was on the way, noting in its latest monthly bulletin that the weakness of the currency threatened to import inflation into the euro zone and promising to take steps to counter it.
The euro remained weak against the dollar, settling around 89.35 cents yesterday evening, just half a cent above its record low. Sterling fell to a six-year low against the dollar but lost little ground against the euro, which was trading just above 60p in the late afternoon.
In its monthly bulletin, the ECB repeated its view that the euro's low exchange rate was out of line with the increasingly positive economic fundamentals in the euro zone. But it warned that the currency's weakness threatened to push up prices in the medium term.
"The depreciation of the exchange rate of the euro, until it is reversed, will heighten the risks to price stability in the medium term on account of its impact on import prices. The ECB will closely monitor this development," the bulletin said.
Germany's Finance Minister, Mr Hans Eichel, appeared to contradict this analysis yesterday, indicating that his government took a more relaxed view of the currency's weakness and was not persuaded of the need for another interest-rate hike. Speaking to a building industry congress in Berlin, he said the euro was achieving most of what was asked of it and that the exchange rate was the only area in which it was falling short.
"I don't want to ignore the danger that the euro nations could import inflation through the weak external value of the euro. However, there is inflation-free growth at the moment, especially because of the deregulation of the telecommunication and energy markets," he said.
Fresh evidence of the strength of Germany's economic recovery came yesterday when the Ifo Business Climate Index reached a nine-year high. The headline west German index rose to 101.2 from 100.5 last month - a bigger jump than most economists predicted.
Dr Willi Leibfritz, an economist at the Munich-based Ifo institute, said the index was likely to rise further in the coming months.
"The general trend is still an upward trend. I would not be surprised if the climate indicator were to move upwards a bit because expectations are still higher than is the assessment of the current situation," he said.
The survey is likely to reassure the ECB's Governing Council, which meets in Frankfurt next Thursday, that the German economy - which represents one third of the euro zone's output - is strong enough to withstand higher interest rates. The ECB has increased rates four times since November and the ECB president, Mr Wim Duisenberg, has made it clear that more increases are on the way.
