The European Central Bank yesterday stepped up its hawkish comments on the risks of inflation in the euro-zone, reinforcing market expectations of an interest rate rise next week.
Mr Ernst Welteke, the Bundesbank president, said it was necessary to curb price risks "as soon as possible" to ensure growth continued unhindered by inflationary pressures.
Widely regarded as one of the doves on the ECB's governing council, Mr Welteke said the weak euro, rising oil prices and strong growth were fuelling inflation. The euro closed yesterday at .9039 against the dollar, up marginally from Thursday's close.
He said the ECB was "anything but pleased" with the euro's weakness, which did not reflect the euro zone's sound economic fundamentals.
Economists said Mr Welteke's comments, which follow similar remarks by Mr Otmar Issing, the ECB's chief economist, and a hawkish central bank monthly bulletin two weeks ago, increased the likelihood that the bank's council would lift rates on Thursday.
Mr Welteke's comments "only make sense if the ECB is planning a rate move next week", said Alison Cottrell, economist at Paine-Webber in London. But opinion among economists remains divided over the likely size of the increase, with the majority expecting a 25 basis point increase, but some forecasting a 50 basis point rise.
Economists at Dresdner Kleinwort Benson in Frankfurt said Mr Welteke's remarks suggested the ECB was preparing the markets for "a more decisive move 50 rather than 25 basis points".
Mr Mark Cliffe, economist at ING Barings in London, also said the tone of the German central banker's comments indicated a half-point rise was now on the cards.
The embattled single currency hit three-month lows this week after Germany's Ifo business climate index fell sharply, sparking fears the euro-zone's biggest economy was slowing.
Several economists expect the euro to come under renewed pressure next week as any rate rise needed to keep the lid on inflation might hurt growth prospects.
"If the ECB do hike rates they will have been more aggressive than the Fed over the past year, raising rates by more than 175 basis points," said Mr Michael Lewis, economist at Deutsche Bank in London.
