Interest rates are on hold across the euro zone as the European Central Bank president, Mr Wim Duisenberg, talked down speculation about imminent increases.
The ECB yesterday left interest rates for the euro zone unchanged at 2.5 per cent at its council meeting and most analysts now predict that interest rates will remain unchanged until early next year.
When Mr Duisenberg last addressed the media on July 15th, he warned that a "tightening bias" was creeping into the Bank's monetary policy, raising expectations that interest rates might rise soon. But he said yesterday that this bias was moving at a "snail's pace". However, he did also warn that rates could rise if excessive pay settlements pushed up inflation during the next few months, although this was seen as aimed at a domestic German audience.
Speaking after the meeting of the governing council in Frankfurt, Mr Duisenberg said that the prospects of economic recovery and continued price stability in the euro zone were good.
"I got the impression that Duisenberg wants to give growth a chance. Certainly they have to be vigilant regarding price pressures and the upcoming wage round and the possible threat to CPI [consumer price index] from imported inflation. They need to watch all this but they didn't seem to be in a hurry to pull the trigger on rates," said Mr Thomas Mayer of Goldman Sachs in Frankfurt.
Most analysts agree that the ECB is not expected to raise rates before next year. However, after Wednesday's surprise decision by the Bank of England, many are sitting firmly on the fence.
Mr Jim Power, chief economist at Bank of Ireland, pointed out that while there is little justification for a rate rise, the ECB could decide that the emergency circumstances which forced it to cut rates in April had passed. The US Federal Reserve has already taken back two-thirds of its emergency cut and evidence that Japan is growing again will underline this. Yesterday, Japan reported that its second quarter GDP was up 0.2 per cent, well ahead of expectations.
Figures released yesterday also showed that economic output in Germany in the second quarter of this year remained at the same level as in the previous three months. Berlin's finance ministry blamed the disappointing figures on weak global demand and factors such as the timing of the Easter holiday. But officials remained confident that the recovery was now under way, with business confidence rising and manufacturers' order books filling up.
"With the good development of investments in Germany and the brightening external environment the momentum of growth will be strengthened in the course of the year," the ministry said.
Mr Duisenberg agreed that the economic prospects for the euro zone were bright and that inflation would remain below the 2 per cent ceiling permitted by the ECB but he warned national governments against going on a spending spree to woo voters.
"The expected improvement in economic activity offers greater opportunities to cut fiscal deficits further and to enhance structural reforms. Indeed, the creation of this virtuous circle depends on all policy-makers playing their part," he said.
The lack of direction for eurozone rates, combined with Wednesday's decision by the Bank of England to raise rates, pushed the euro lower against the British currency. The euro fell to $1.0549 from $1.0588 and to 64.68p against sterling from 65.80p before the rate move on Wednesday.
As a result the pound closed at 81.95p against sterling from 82.60p before the British rate rise. According to Mr Power, sterling is once again flavour of the month and the pound could now be heading towards 81p.
