The euro zone's largest economy is remaining resilient in the face of higher oil prices and rising interest rates, according to the latest published index of German business sentiment.

The closely watched Ifo business climate index fell to a reading of 105.6 in July compared to a June reading of 106.8, but the fall was less than expected. The euro rose modestly to $1.2588 yesterday in response to the news.

The latest survey follows the publication of similar indicators showing signs of economic slowdown in other euro-zone economies. Persistently high oil prices, the strong euro, the European Central Bank's (ECB) aggressive rate tightening intentions and worries about a possible downturn in German growth due to next year's 3 per cent VAT hike are all taking their toll, Bear Stearns International economist David Brown said yesterday.

German chancellor Angela Merkel's coalition government plans to raise the rate of value added tax from 16 to 19 per cent next year to plug a hole in Germany's public finances.

However, analysts had feared a sharper fall in the Ifo index and most reacted positively to the latest number.

"It is stronger than I thought," Citigroup economist Juergen Michels said yesterday.

By remaining above 100, the latest Ifo reading has copperfastened expectations that the ECB will raise interest rates next Thursday.