Slump in Germanconfidence sends euro sliding again

The European Central Bank may have to scrap plans for another interest rate hike, the head of Germany's leading research agency warned, as it reported a sharp drop in business confidence.

The European Central Bank may have to scrap plans for another interest rate hike, the head of Germany's leading research agency warned, as it reported a sharp drop in business confidence.

The respected Ifo institute said its index of business climate for July fell to its lowest level for eight months, confounding financial markets' expectations of a rise. The index fell to 99.1, from 100.4 in June, and is the second consecutive monthly fall in confidence in Europe's largest economy. The euro fell after the survey was released, dropping below the key $0.90 mark to hit a three-month low of $0.8976 against the dollar.

Gernot Herb, Ifo's research chief, said the survey could be a sign that the ECB should keep rates on hold if the results were repeated across the other 10 members of the single currency zone. "The slowdown in the July survey could be a signal to the ECB to wait for a clearer picture," Mr Herb said.

The Ifo report also recorded falls in its indices of current business condition and business expectations. The survey breaks a recent run of data showing strong economic recovery and rising inflation, which had prompted many analysts to pencil in a rise of 0.25 or 0.5 percentage points at either of the next two ECB rate meetings, on 31 August or 14 September. The announcement of the survey had an immediate impact on the euro. Robert Lind, an economist at ABN Amro in London, said: "The euro's response to the news was predictable but exaggerated. Even after today's falls, all three indices remain close to historic highs."

Ralph Solveen, of Commerzbank in Frankfurt, said the survey would not diminish inflation worries at the ECB, which earlier this month warned of a threat of imported inflation stemming from a combination of rising oil prices and a weak euro.

Analysts had expected the Ifo index to rise on the back of tax reforms by the German government, which have been welcomed as business-friendly. "I don't believe that one can already talk about the end of economic recovery in Germany," Mr Solveen said.

Private banks in the eurozone appeared to agree, bidding up the rates paid for ECB funds to almost 4.5 per cent, well above the ECB's current base rate of 4.25 per cent, in a sign the market expects an official rate hike as soon as next week.

The rate is the highest since the ECB moved from a fixed rate to a variable rate system, under which it sets a benchmark, currently 4.25 per cent, but asks for tenders from the banks.