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The BBC's Tim Bowler
"For some currency experts the ECB has only itself to blame"
 real 56k

Friday, 25 August, 2000, 15:59 GMT 16:59 UK
The ECB's rate dilemma
German growth could worry the ECB
German growth could worry the ECB

by BBC business reporter Jonty Bloom

Next week is going to be another tough one for the euro.

The European Central Bank will be meeting to decide whether or not to increase interest rates. It is going to be a tough decision.

On Wednesday Otmar Issing, the ECB's chief economist, said that it was unlikely that the Euozone's inflation rate would fall below its target's ceiling of 2 percent.

That seems a pretty heavy hint that interest rates will have to rise next week.

And given that the euro is once again near its all time lows it would at first sight seem an almost betting certainty. But that may not be the case, for two reasons.

All on holiday

The first is a rather trivial one to do the European holidays.

The board of the ECB is not likely to actually meet in person next Thursday because so many are on their hols.

Instead a video conference will be arranged.

Many experts have taken this not only as a sign that interest rates won't rise in August (it would ruin too many central bankers' holidays) but also as a sign that the ECB isn't as serious an organisation as America's Federal Reserve.

The Fed, being American, is efficient and serious and isn't distracted from its eternal vigilance by anything as wimpish as holidays. Indeed, the Fed holds a special conference in Jackson Hole, Wyoming, at the end of August, to encourage central bankers to combine their vacations with a think-in about the prospects for the global economy.

German puzzle

But the much more serious reason is that latest evidence about the state of the German economy.

Germany's key Ifo business index surprised everyone with a sharp fall in July, showing that business confidence is at its lowest level since November 1999, suggesting Europe's largest economy may be still in the doldrums.

The index's publication pushed the euro down this week to a three-month low against the dollar of $0.8890 on Wednesday.

This leaves the ECB in the position of probably wanting to put up interest rates to try to bring down inflation and bolster the euro but worried that higher rates will have an adverse effect on the German economy.

Germany's economy is far and away the largest in the Eurozone and the ECB, which is based in Frankfurt, won't want to damage its sustained recovery.

The ECB's decision will come down to whether they think the bigger risk comes from the possibility of higher prices or the risk of lower German growth.

Given the difficulty of the task the ECB's members may decide to wait until they are back in the office next month before they make up their minds.

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See also:

25 Aug 00 | Business
Bundesbank boosts euro
24 Aug 00 | Business
German inflation suggests rate rise
23 Aug 00 | Business
Dollar stomps euro, pound
11 Aug 00 | Business
ECB report sparks euro rise
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