The European Central Bank yesterday raised its key interest rate by a quarter point. However, the widely expected increase in the cost of borrowing failed miserably to bolster the value of the plummeting euro.
The currency dived once again to new lows, and was heading rapidly towards 90 cents during trading in New York.
Many traders had already discounted yesterday's rate hike, which took the main lending rate to 3.75 per cent and also raised the ECB's other two key rates by a quarter-point. The central bank made it clear it saw the weak exchange rate as one of the main risks to price stability.
Rolf Schnieder, the head of macro-economic research at Dresdner Bank in Frankfurt, predicted a further rate rise before the euro recovers in the second half of the year. "It is very difficult to see this announcement making a big impact because the decision was expected and because there are also expectations that interest rates will rise in the US," he said.
"The ECB's move got the thumbs down from the currency market. It doesn't look like anything is going to stop it falling at the moment," said Nick Stamenkovic, a currency analyst at Ideaglobal.com.
Wim Duisenberg, president of the central bank, and European politicians insist that the currency's exchange rate does not reflect the underlying strength of the economy of the 11-nation eurozone.
The euro has fallen by a fifth against the dollar since its launch last year, partly due to concerns that the eurozone is not pursuing whole-hearted structural reform. This has undermined confidence in the currency, whose weakness is boosting the cost of imports.
Combined with an increase in the cost of oil, this has taken the inflation rate in the eurozone up to 2.1 per cent in March, exceeding the ECB's 2 per cent ceiling for the first time since the euro's inception.
However, there is some evidence that the inflationary pressure is already receding, at least in the bigger euro-area economies. German inflation, which reached 1.9 per cent in March, is expected to fall back to 1.5 per cent to April.
The ECB believes that the euro will recover once the region's economy catches up with US growth rates. New American figures yesterday suggested this could be some time away.
The International Monetary Fund predicted in its latest forecasts that eurozone growth will lag well behind America this year, although the European Commission forecasts the 11 Eurozone nations will outperform the US in 2001.
Yesterday's rate rise was politically controversial. Before the announcement, the French finance minister called for no change in interest rates.
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