ECB warns of higher inflation if the euro fails to strengthen

The weak euro held out the threat of higher inflation unless its fall was reversed, the vice-president of the European Central Bank said yesterday.

Christian Noyer said the weakness of the currency did not reflect the fact that prospects for growth in the eurozone were better than they had been for years. "In the near future, the value of the euro will increase," he predicted.

His comments came as Germany's six influential economic research institutes raised their forecast for the country's likely growth this year to 2.8 per cent, the fastest since the reunification year of 1992. Their latest prediction, due to be published this morning, reflects the boost the weak currency has given to German exports, and is more upbeat than the government's official forecasts.

The communiqué from the weekend's Group of Seven (G7) meeting in Washington stated that growth in the eurozone would continue to strengthen, although adding a call for further structural reforms.

The policymakers emphasised the need for global growth to rely less on the United States and more on Europe and Japan.

"Continued vigilance and further action are needed to promote a more balanced and therefore more sustainable pattern of growth amongst our economies," the statement said.

European policymakers are confident, however, that the area is on course to expand at a healthy pace. Ernst Welteke, the president of the Bundesbank, predicted growth in Europe could even overtake the US. "Growth prospects in Europe and Germany are extremely bright," he said.

The chief concern, however, is that inflationary pressures due to the weak exchange rate will force the European Central Bank to raise interest rates again this spring.

Mr Noyer, speaking to the European Parliament's economic and monetary affairs committee, said the depreciation of the euro would put pressure on import prices and put price stability at risk.

"Present exchange rates do not reflect economic fundamentals," Mr Noyer said.

The currency continued to languish on the foreign exchanges yesterday, weakening against the yen after the weekend G7 meeting.

It climbed to 95.70 cents against the dollar and 99.8 yen, up slightly from earlier lows. However, the currency remains about 15 per cent lower than its launch value and its index against a range of currencies has fallen 3 per cent since the start of this year.