The rate cuts in April had been in excess of market expectations. They were driven by a need to protect the economy from downside risks to both growth and inflation (ie, a possible deflation). Economic conditions have changed significantly since then. As President Duisenberg of the ECB pointed out, ``several indicators suggest there is ample liquidity. Inflation rates are expected to increase gradually.'' He added that ``an increase in interest rates now should contribute to maintaining inflation expectations safely below 2 per cent.'' This is in line with the ECB objectives given below. At thesame time, real economy indicators point to a robust recovery and financial market trends indicate improved growth expectations.

ECB Objectives - Article 105 of the Maastricht Treaty: ``The primary objective of the ECB shall be to maintain price stability. Without prejudice to the objective of price stability, the ECB shall support the general economic policies in the Community.''

The move, though initially welcomed as a brave, pre-emptive strike against inflationary pressures, soon generated controversy. Economists and commentators questioned whether the hike came too early and could undermine European economic recovery. The release of the Germany September manufacturing orders (a fall of 4.5 per cent) on the same day also disappointed market expectations and increased criticism of the ECB.

Politicians, of course complained that the central bank was ignoring its responsibilities for ensuring job creation and growth. In India, the Reserve Bank of India fully met all its obligations on this front lastweek by delivering a CRR cut and pumping liquidity where none was expected. As I had mentioned in last week's article, central bank's objectives differ widely based on the extent of independence they have.

The new-born euro, which has been beset with health problems since its birth in January, resumed its slide. It has already depreciated over 14 per cent from its year opening levels. Just a few months it look set to face the ignominy of dropping below parity, and being worth less than a dollar. Till the year-end, we may see it coming under increased pressure on account of Y2K flows into the US Dollar and liquidation of (losing) long Euro positions. The credit tightening measures are also be negative for the Euro in the short term.

The New Year should, however, see a new invigorated euro with strength and balance. The tightening is based on economic recovery hopes and is thus long-term positive for the currency. Recent data highlight an upturn in Euro-area growth, particularly in the manufacturing sector.Euroland business confidence posted a sharp rise in October on the heels of eight months of improvement. Output expectations have now recovered all the ground lost during the emerging market crisis. Industrial production is on track for 1.5 per cent growth in third quarter to be followed up with a 2 per cent growth in fourth quarter and a probable 4 per cent annualised GDP growth in second quarter 1999.

Growth is being supported both by an export rebound as also strengthening domestic demand. While Y2K may have boosted activity a bit, this cannot be the only factor behind the upturn. Germany remains the only laggard in an otherwise rosy picture. It is not yet out of the woods. This remains a risk as the German manufacturing sector represents 35 per cent of Euroland's.

While Duisenberg pointed out that the Euro-area economy is not ready to follow the recent phenomenal productivity performance of the US because of structural rigidities (thus estimating trend growth at 2-2.5 per cent), there is no doubtthat the gap between the two should narrow. Under extant circumstances, the improving outlook for Euroland offers a stark contrast with the ``bubble-economy'' concerns for the US. It is benefiting from a weaker currency and accommodative monetary policies. Real short and long-term rates are at low levels and with the weak Euro; monetary conditions are at their loosest in many years. This remains true even after the hike, suggesting a need to further increase next year. While the Euro may end the year at a relatively weak US Dollar 1.03-1.04 per Euro, its future prospects are better.

The gradually improving cyclical growth environment in the Euro area will eventually reflect in a stronger currency in the New Year. And the original benefits of integration, i.e. more efficient allocation of capital and rationalisation of businesses will also drip down into an above trend growth economy.

The author is head, treasury marketing in a leading foreign bank. The views expressed are his own and not that of hisorganisation.