ECB shifts bias to higher interest rates

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THE EURO recovered above $1.02 yesterday after Wim Duisenberg, president of the European Central Bank, indicated that he was starting to consider the prospect of higher interest rates. The ECB's policy has previously been "neutral" since it cut interest rates to 2.5 per cent in April.

"A bias may be creeping into our considerations," he said. Mr Duisenberg indicated that this bias was prompted by higher borrowing and monetary growth in the euro area.

Economists said no increase was likely before next spring.

There was a sharp fall in European bond markets in reaction to Mr Duisenberg's comments. The yield on the benchmark 10-year German government bond jumped 12 basis points to 4.78 per cent.

US bond yields declined, in marked contrast, as new figures yesterday showed unchanged headline consumer prices for the second month running in June. The inflation rate fell to 2.0 per cent, after climbing as high as 2.3 per cent in April.