Interest rates remain on hold across the euro zone despite warnings that Germany may be heading into a recession.
The decision caused little surprise after recently reported figures showed inflation running at a record 3.4 per cent on average across the euro zone, significantly higher than the European Central Bank's 2 per cent ceiling.
Afterwards, ECB president Mr Wim Duisenberg repeated that this strategy was "appropriate" at the moment.
The ECB governing council met in Dublin in the first of its twice-a-year gatherings in European Union capitals. According to Mr Duisenberg, inflation will fall back below 2 per cent next year. He pointed out that the ECB looked at inflation over the medium term when assessing interest rates. Nevertheless there was no hint that a cut would appear even by the next meeting.
Mr Jim O'Leary, chief economist at Davy Stockbrokers, says the ECB will need more evidence of a slowdown across the euro zone as well as a downturn in inflation before it can act.
Inflation would probably need to fall towards 3 per cent at least before the ECB could act. "The most likely date for an interest rate cut at the moment is September," according to Mr O'Leary.
Yesterday, Mr Duisenberg insisted the current rate of 3.4 per cent would prove to be the peak for this cycle. Mr Duisenberg pointed to energy and food prices, as well as the depreciation of the euro, as reasons why inflation had been above the 2 per cent upper limit it had set itself for 40 per cent of the time since it assumed control of euro zone interest rates. He added that he was "very confident" that inflation would be less than 2 per cent in 2002.
However, he added that the ECB would also want to ensure that the "current upward movement of prices does not become more lasting". This means that wage moderation would have to continue, he said.
Asked whether the 2 per cent limit was appropriate given the higher tolerances of the US Federal Reserve and the Bank of England, he insisted that "there is no need to revise our figures".
His comments hit the euro again with the market expressing concern that this pace would be too slow to revive economic growth.
The euro is falling because of fears that the ECB will be unable to cut rates until inflation subsides, despite the need in certain euro-zone economies for lower interest rates to encourage growth.
Mr Duisenberg was confident a global recession would be avoided despite the "great uncertainty" in the global environment. "I do not expect a recession, I think the actual growth in GDP will be broadly in line with trend growth." He added that much of Germany's woes were due to a downturn in the construction sector which had a "considerable influence" on the economy.
The ECB president refused to confirm ongoing speculation that he would step down after the introduction of notes and coins next year in accordance with a deal reportedly done at the time of his appointment in 1998.
The French candidate, French central bank governor Mr Jean Claude Trichet, was expected to replace him, although he has since become embroiled in investigations into past activities.
Sources suggested the succession issue was more of a problem for the French, whose ECB vice-president Mr Christian Noyer is due to retire next year, than for the bank as a whole.
