Europe raises rates

The European Central Bank has raised interest rates by 25 basis points to 3.75%.

The move was widely expected, given the weakness of the euro and fears that inflation was set to rise in the euro zone.

But so far, the euro has failed to derive any comfort from the increase, dipping below 92 cents to 91.80 cents as the news was announced.

In recent days, Europe's single currency has hit new lows against both the US dollar and the yen.

The weakening currency could lead to higher prices for imported goods, raising fears of inflation in the euro zone.

Some traders now say it could soon slip below the 90 cents level.

Rate rise expected

Most market players had expected the central bank to raise rates. ECB president Wim Duisenberg had previously indicated that further rises were imminent. "There can be no doubt in anybody's mind on what direction the next move will be," he said.

This may explain the euro's subdued reaction to the rate rise.

Some traders may interpret the bank's decision to raise rates as a sign that it is panicking.

The figures are so sparkling I have no fear for the euro

Gerhard Schroeder

Analysts say there is little the central bank can do to restore faith in the euro as US economic growth roars ahead of that in Europe.

"Given that the euro is unlikely to rebound strongly, we are likely to see further rises from the ECB. I don't think it is a question of supporting the euro. I think it is really a question of them offsetting the monetary impact of a weak euro," he added.

The ECB last raised rates on 16 March saying it needed to respond to growing inflationary risks resulting from depreciation in the euro, strong gains in oil prices and an upturn in the euro-area economy.

The weaker euro has already fed through into higher prices.

In the euro zone, inflation reached 2.1%, just above the ECB's 2% target.

In contrast to the euro, the dollar has remained strong in spite of record falls in US shares.

The US central bank is also expected to raise interest rates at its next meeting on 16 May, a move which will further boost the dollar.

Euro warning

German chancellor Gerhard Schroeder defended the euro on Wednesday, saying the "sparkling" performance of the euro zone economy defied the currency's record weakness.

"The figures are so sparkling I have no fear for the euro," he said.

His confidence is not shared by leading German financial experts who recently warned that the currency would continue to weaken in the absence of economic reform.