UK economy 'worse than thought'

The CBI, the UK's largest employers' organisation, has warned that the UK economy is deteriorating faster than it previously thought.

There was "no doubt that the mood has darkened in the last two or three months," its director general Richard Lambert warned members in a letter.

Forecasters, including the CBI, had been "over-optimistic" about the economic outlook, he added.

High inflation and slowing growth have prompted fears of a possible recession.


A year ago it seemed reasonable to hope that the worst would be over by now. That has not turned out to be the case
Richard Lambert
CBI

The level of inflation - which most analysts expect to surpass 4% when the July figures are released this week - had taken people "by surprise", Mr Lambert said in the letter, seen by the BBC.

And he added that the credit crunch had been "bigger and broader" than first expected.

"A year ago it seemed reasonable to hope that the worst would be over by now . That has not turned out to be the case."

Growth forecast cut

Economic activity is slowing in all key sectors of the economy, business confidence is waning and falling house prices and tight credit conditions have dented consumer spending.

"This is why most analysts are now suggesting that the economy will at best only manage to stagnate in the coming few quarters, and that the growth prospects through 2009 and into 2010 look no better than anaemic," Mr Lambert said.

The CBI earlier cut its forecast for growth in 2009 from 1% to 0.4%.

And last week the International Monetary Fund again revised down its forecast for UK economic growth this year and next year.

It now expects growth of 1.4% this year and 1.1% in 2009, although the government still expects the figures for both years to be 2% or above.

'Uncomfortable'

"The CBI, along with most other forecasters, has been consistently over-optimistic about the economic outlook over the last 12 months," Mr Lambert added.

He added that there were still many companies who were doing well - especially in the manufacturing of high value items.

But he conceded that it was going to be an "uncomfortable time" for many.

"A sharp economic slowdown is a new experience for many people in government and in business," he said.

Inflation surpasses 12% in India

Inflation has risen above 12% in India despite government efforts to tighten monetary policy.

Annual consumer prices rose by 12.01% in the week ending 26 July, a fresh 13-year high, up from 11.98% the week before - according to official figures.

Successive interest rate rises in recent months have done little to quell inflation, driven higher by escalating food and commodity prices.

Economists warned inflation would rise further before easing next year.

'Apprehension'

Double-digit inflation poses a threat to India's rapid economic progress with government fuel subsidies - designed to cushion people from the impact of rising prices - putting increased pressure on public finances.


Tightening credit in three consecutive quarters have not helped in lowering inflation
Amit Mitra, Federation of Indian Chambers of Commerce and Industry

Inflation was below 5% a year ago but many economists believe it will peak at close to 14% later this year.

Three interest rate rises since July - which has pushed borrowing costs up by one and a quarter percentage points - have had little impact.

Critics of government policy say the rate hikes have done nothing to address the source of inflationary pressures and, instead, are threatening companies' growth prospects.

"Tightening credit in three consecutive quarters have not helped in lowering inflation," said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry.

"If this kind of strict monetary policy is followed further, we are apprehensive," he added.

Although prices are expected to rise further in the short term, India's central bank believes the slowing global economy and the falling oil price will eventually impact on inflation, bringing it down below 10% next spring.

OVL, Mittal, Essar shortlisted for Algerian bid round

NEW DELHI: ONGC Videsh, Essar, Oil India and Steel baron Lakshmi N Mittal's investment firm have been shortlisted by Algeria to bid for oil blocks on offer in its latest licensing round.

While OVL, the overseas investment arm of state-run Oil and Natural Gas Corp (ONGC), and OIL have been shortlisted as operators of the oilfields, Mittal Investment Sarl and Essar have been prequalified to participate as financial investors, industry sources said.

OPEC member Algeria is offering 16 zones called parameters for bidding in its 7th exploration and production licensing round, bids for which close on December 3, 2008.

Each zone or parameter contains two to three blocks and in all there are 38 blocks in the 16 zones on offer.

Companies have to make bids for the 16 parameters (zones) and not individual blocks, that would be awarded within two hours of the bid closing on December 3.

Sources said though OVL and Mittal Investment have a joint venture for overseas oil hunt (called ONGC Mittal Energy Ltd), the two have made separate expression of interests. OIL is likely to bid with state refiner Indian Oil Corp.

Algeria intends to sign contracts on December 17, they said but could not identify the foreign companies shortlisted for the bidding round.

The round, the first since April 2005, has been keenly awaited by multinational companies seeking permits to explore in Algeria, which is among the world's top owners of oil and gas reserves and a major gas exporter to Europe.

"The selected zones are in different Algerian sedimentary petroleum basins offering a high potential in petroleum resources," said a statement by the Energy and Mines Ministry's National Agency for the Valorisation of Hydrocarbon Resources (ALNAFT).

'Biofuel can ensure India's energy security'

BANGALORE: When Henry Ford fuelled his car with ethanol way back in the 1930s, some admired him while others considered it a stunt. Eight decades later, Indian experts working on biofuels as an alternative source of energy feel everyone can be a Ford.

But there are many hurdles in the way as myths and misconceptions surround use of biofuel as an energy source.

"Myths and misconceptions about biofuels are coming in the way of promoting them as an alternative source of energy," K.D. Gupta, chairman of the New Delhi-based Institute of Applied Systems and Rural Development (IASRD), told IANS on the sidelines of a seminar on

Biofuel for Sustainable Growth here.

"We have to demystify the issues at stake to ensure our energy security in future," Gupta observed.

Experts believe biofuel will be the best alternative to the energy crisis arising out of soaring crude prices and depletion of fossil fuels at a faster rate.

"Biofuel can make India self-sufficient in energy source as the product has been proven to be efficient, sustainable, cost-effective and pollution-free," Karnataka Council for Technological Upgradation managing director N. Chandrasekhar said.

As a cleaner burning fuel produced from renewable resources like soybean oil, biofuel can be used alone or blended with other petroleum products like heating oil. It is biodegradable and can be domestically produced.

Other biofuels can be extracted from dry organic matter or combustible oils produced by plants. Alcohol (from fermented sugar), black liquor from paper manufacturing process and wood are some of the sources of bio-organic fuel.

"Biofuels are renewable liquid fuels made from plant matter rather than fossil fuels. Primary biofuels are ethanol and bio-diesel. They help reduce air toxics emissions, greenhouse gas build-up and dependence on imported oil," Gupta explained.

Gupta said biofuel plants such as Jatropha were best cultivated in wastelands and would not impact food production.

"We never encourage farmers to sow biofuel plants in fertile farmland. Plants like Jatropha, Hongai and Neem that yield biofuel require minimum water and maintenance. What's more, animals or insects do not feed on them. And ethanol is a by-product of sugarcane," Gupta pointed out.

Biofuel is cleaner than fossil fuels due to its lower sulphur content.

"As a future source of energy, biofuel has the potential to change urban transportation and bring about a revolution in rural India where farmers can use it to run tractors and derive biogas and organic manure as its residue for lighting, cooking and soil nutrient instead of using toxic fertilisers," Gupta asserted.

Increasing use of biofuels will also enable India to lesson its dependence on oil imports, which account for 73 percent of total fuel consumption.

"The message is yet to spread across. We have decided to conduct sustained campaign across the country," said S.C. Tripathi, IASRD chief patron and former secretary in the petroleum ministry.

"The country's development is correlated to energy use. Once our energy requirements are met, growth can be ensured," he added.

To propagate biofuel cultivation, IASRD has carried out extensive plantation of Jatropha in Gujarat, Haryana, Karnataka, Madhya Pradesh, Punjab, Rajasthan and Uttarakhand.

State-run oil marketing firms like Bharat Petroleum Corporation Ltd and Indian Oil Corporation Ltd have been using five percent of ethanol as an additive in petrol and diesel over the last couple of years.

"We want ethanol content to be increased by another 10 percent in petrol and diesel. The greater the use of ethanol, the more fossil fuels will be eco-friendly. Use of bio-diesel and bio-petrol do not require any change in the vehicle engine," BPCL marketing manager Charles David affirmed.

European Bonds Post Third Weekly Gain on Outlook for ECB Rates

European government notes posted a third weekly gain after central bank President Jean-Claude Trichet said economic growth will weaken, prompting investors to reduce wagers on higher borrowing costs this year.

Two-year notes led the advance, pushing the difference in yield with the German 10-year bund to the widest since May 20, after reports this week added to signs growth in the region is faltering. The European Central Bank held its benchmark rate at 4.25 percent on Aug. 7, after which Trichet said expansion will be ``particularly weak'' in the second and third quarters.

``A lot of people took heart from what Trichet had to say about growth, as there was anxiety that he'd be more hawkish,'' said Marc Ostwald, a fixed-income strategist in London at Monument Securities Ltd. ``There is a sense the ECB is giving some ground.''

The yield on the two-year note dropped as much as 7 basis points to 4.03 percent, and was at 4.07 percent by 4 p.m. in London, heading for its biggest weekly drop since the period through Feb. 8. The price of the 4.75 percent note due June 2010 rose 0.02, or 20 euro cents per 1,000-euro ($1,504) face amount, to 101.16.

The yield on the 10-year bund, Europe's benchmark government security, was at 4.26 percent, leaving it 8 basis points lower in the week.

Government bonds pared gains yesterday as some investors bet there was still a risk the ECB will resume raising interest rates to restrain prices and discourage workers from seeking higher wage increases.

`Market Ahead of Itself'

``In the short term, our suspicion is the market has got ahead of itself,'' Sean Maloney, a debt strategist in London at Nomura International Plc, said.

Trichet told a press conference in Frankfurt there is ``no bias'' or ``pre-commitment'' toward future rate movements, repeating what he said July 3 after the previous rate decision. The ECB has observed ``some materialization of risks that we had identified'' he said.

Factory production in Germany rose by less than economists forecast in June, a government report showed Aug. 7. Separate data a day earlier showed factory orders in Europe's largest economy unexpectedly slipped in the same month.

Yield Difference

The difference in yield, or spread, between 10-year German bonds and U.S. Treasuries has narrowed 19 basis points in the past two weeks, to 33 basis points today. German two-year notes, which are more sensitive to interest-rate changes, yielded 19 basis points less than the 10-year bund, compared with 9 basis points a week ago.

The implied yield on the December Euribor futures contract fell 14 basis points in the past week and was last at 4.93 percent, indicating fewer investors expect the ECB to raise interest rates to fight inflation.

Europe's central bank is struggling to contain inflation which, at 4.1 percent, quickened to more than twice its ceiling in July. The fastest consumer-price growth in 16 years has come as the impact of the economic slowdown sparked by the collapse of the U.S. housing market has spread to Europe.

``The ECB press conference was more dovish than the market was anticipating,'' analysts led by Thorsten Weinelt, global head of research and chief strategist at Unicredit Markets & Investment Banking, a unit of Italy's largest lender, wrote in a client note. ``Expect today's price action to be dominated mainly by a re-assessment of yesterday's strong market movements.''

IMF's View

Europe's economy will grow 1.2 percent next year, with growth in Germany, the largest of the 15 nations that share the currency, slowing to 1 percent from 2 percent this year, according to the International Monetary Fund.

Italy's economy unexpectedly shrank in the second quarter, edging it closer to a fourth recession in a decade as households and businesses struggle to cope with more expensive oil.

The economy, the fourth-largest in Europe, contracted 0.3 percent after expanding 0.5 percent in the first quarter, the Rome-based statistics office Istat said yesterday. Economists expected stagnation, according to the median of 22 forecasts in a Bloomberg News survey. From the same period a year earlier, the economy didn't grow at all.

European government bonds returned investors 2.3 percent this year, while U.S. debt earned 3.1 percent, according to Merrill Lynch & Co.'s EMU Direct Government and U.S. Treasury Masters indexes.

Crude oil losing steam; to fall below $100 a barrel: Analysts

NEW DELHI: Crude oil is on a downward spiral and analysts now see its price slipping below 100-dollar per barrel mark by next month -- a far cry from the forecast of 200-dollar level given a few weeks ago.

With signs of slowdown engulfing most of the economies across the world, declining demand and easing geo-political tensions, the crude prices might return to double-digit figures, analysts believe.

The prices have already slumped by over one-fifth from the record high levels of over 147 dollars on July 11 and slipped below 115 dollar per barrel on New York Mercantile Exchange last week.

As long as the bull-run was on in crude oil market, analysts were forecasting that a level of 200 dollars was not far away and a 150-dollar estimate was being made for October itself.

"Crude has lost quite a lot in the last few weeks and USD 100 a barrel is of course within reach by September with demand falling amid global slowdown," commodity brokerage firm Karvy Comtrade's Research Head Harish Galipelli said.

Demand is expected to come down as major economies like the US have hiked interest rates to contain inflation, Harish said, adding that a similar situation prevails in China as well as India.

A significant rise in dollar against major currencies has also affected prices, he added.

"If demand falls drastically then it is quite possible to touch USD 100 per barrel level in the coming weeks," Religare Commodities' Commodity Business Head Jayant Manglik said. A fall below the 100-dollar mark would wipe off nearly entire gain in the crude prices this year.

Euro Falls the Most in 8 Years on Reduced Bets for Higher Rate

The euro fell the most in almost eight years, pushing the currency to a six-month low against the U.S. dollar, as traders pared bets the European Central Bank will raise interest rates as the economy slows.

The euro dropped below $1.50 for the first time since February after ECB President Jean-Claude Trichet yesterday said economic growth will be ``particularly weak'' through the third quarter. An index that tracks the dollar against the currencies of six U.S. trading partners touched the highest since February. Crude oil fell to a three-month low, silver reached its cheapest since January and copper headed for its biggest weekly drop since March, easing inflation concerns.

``We are now seeing a lot more negative surprises coming out of Europe than from the U.S., more so than any time during this credit shock,'' said Jim McCormick, head of currency strategy at Lehman Brothers Holdings Inc. in London. ``At the same time, you've got some pretty strong capital inflows to the U.S. We kind of have the perfect circle of fundamentals bumping into strong technicals.''

Europe's shared currency tumbled 2.08 percent to $1.5005 at 5 p.m. in New York and reached $1.499, the lowest level since Feb. 26, from $1.5325 yesterday. The slide was the biggest one- day drop since Sept. 6, 2000, when the currency dropped the most since the 1999 introduction of the euro.

Against the yen, the European currency slipped 1.4 percent to 165.38, from 167.70. The dollar rose 0.67 percent to 110.18 yen after touching 110.36, the strongest since Jan. 2.

Moving Average

The euro's decline below $1.53 and the break of the 200-day moving average at $1.5226 ``marks a significant change in sentiment for the dollar,'' pointing to a further decline to $1.46, Kevin Edgeley, a London-based technical analyst at Goldman Sachs Group Inc., wrote in a report today. It was the first time the euro fell below the 200-day moving average since 2006.

Since reaching a record high of $1.6038 on July 15, the euro has dropped 6.4 percent. The so-called trading envelopes, which measure how far from the mean a price has strayed, show the euro's decline has doubled the typical changes versus the dollar in the past 20 days.

``The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,'' said David Woo, global head of currency strategy at Barclays Capital Inc. in London. ``None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical-driven move. From that point of view, we do not think that this move is sustainable.''

`Undervalued'

The euro is about 2.5 percent ``undervalued'' against the dollar, according to Barclay's models, Woo wrote in a research note to clients today.

The European currency has declined 3.6 percent against the dollar in its fourth weekly decline, the worst losing streak since May 2007. Against the yen, the U.S. currency has advanced 2.2 percent, its biggest weekly gain in almost two months.

The Dollar Index on the ICE futures exchange reached 75.903 today, the highest since Feb. 21.

Mohamed El-Erian, co-chief executive officer of Pacific Investment Management Co., said the U.S. government's efforts to support Fannie Mae and Freddie Mac will lead to greater Treasury issuance and a weaker dollar.

``It's ultimately inflationary as long as the global economy doesn't collapse,'' El-Erian said in an interview on Bloomberg Radio.

Russian Ruble

South African's rand led losses among the most-traded currencies as the prices of gold and platinum dropped, reducing prospects for export earnings from the country's biggest exports. The greenback rose to a six-month high against the Australian dollar, and advanced to the highest since September against the New Zealand dollar on speculation the central banks will cut borrowing costs.

Russia's ruble fell by the most in 2 1/2 years against a dollar-euro basket used by the government after Georgia's Interior Ministry said four Russian fighter-jets entered Georgian airspace and bombed the towns of Gori and Kareli, boosting the risk of war. The ruble dropped as much as 0.8 percent against the basket.

The pound fell below $1.93 for the first time since March 2007 as the Bank of England kept its main interest rate steady at 5 percent yesterday after inflation accelerated and the economy teetered on the brink of a recession. It has dropped 2.7 percent this week to $1.9212, its biggest weekly drop in three years.

`No Bias'

Trichet said yesterday he has ``no bias'' or ``pre- commitment'' toward future rate movements after the central bank left the main refinancing rate at 4.25 percent. He told reporters in Frankfurt that while inflation remains a threat, risks to economic growth are ``materializing.''

European retail sales dropped by the most in at least 13 years in June, the European Union said on Aug. 5. Consumer confidence slid in July by the most since the Sept. 11, 2001, terrorist attacks, the European Commission said July 30.

``This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''

Traders pared bets the ECB will lift rates a second time this year after increasing its main rate by a quarter-point last month. The implied yield on the December interest rate futures, an indication of expectations, retreated 2 basis points to 4.94 percent today.

Oil, Metals, Crops

Crude oil, metal and crop prices fell as the dollar climbed, reducing the appeal of commodities as a currency hedge. Oil has declined to $115.15 a barrel since touching the record of $147.27 on July 11.

The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

Fresh record for euro inflation

Eurozone inflation jumped to 4.1% in the year to July, the highest since the measurements began in 1997, according to EU statistics office Eurostat.

Inflation in June in the 15 nation bloc was 4.0%, also well above the European Central Bank's 2.0% target.

Meanwhile, unemployment in the euro zone has unexpectedly risen, a sign that economic growth is slowing.

Balancing the risks of rising prices and a downturn pose a challenge for European Central Bank policymakers.

Eurostat revised its May unemployment number up from 7.2% to 7.3% and said it had remained at that level in June.

Spain, hit hard by a housing slowdown, saw unemployment soar to 10.7% - the highest among euro nations and in the 27-nation European Union.

In Germany, Europe's largest economy, the rate was 7.3%.

Rate peak?

The ECB acted earlier this month to control inflation by increasing its key interest rate for the first time in a year to counter the effects of rising food and fuel costs.

Rates rose to 4.25% from 4%.

However, analysts say the central bank may have to hold fire on further rate increases as the European economy slows and companies cut jobs.

Soaring fuel and food prices have limited consumer spending and a strong euro has hurt exports.

"The further increase in Eurozone inflation in July will intensify the ECB's already alarming concern about inflation," said Martin Van Vliet, economist at ING Bank.

"However, with oil prices off their peak and downward momentum in economic activity gathering pace, dampening inflationary pressures in the medium term, the most likely path for interest rates is to be on hold for the rest of the year."

Fears of European Slowdown Weaken the Euro

FRANKFURT — The euro tumbled Friday to near the $1.50 mark — its lowest level against the dollar since February — amid new signs that the European economy was slowing.

The decline in the euro helped to send oil prices to a three-month low on Friday in New York trading. Crude oil fell $4.82 a barrel to settle at $115.20 in New York trading.

In Europe, the latest indication of a slowdown came with a report that the Italian economy had unexpectedly shrank in the second quarter, adding to the sentiment that the European Central Bank was now more likely to cut, rather than raise, interest rates at its next meeting.

The euro fell to $1.5004 Friday before rallying slightly, atop a similar slide Thursday. The euro hit a record high of slightly more than $1.60 on July 15, a week after the European Central Bank bucked the trend of the world’s major central banks and raised its benchmark interest rate.

“There’s a real capitulation under way,” David Gilmore, partner at Foreign Exchange Analytics in Essex, Conn., told The Associated Press on Friday. “In 24 hours it’s gone from $1.55 to $1.50, which is highly unusual. That changes your game plan for the marketplace.”

The stronger dollar also helped ease concerns that a conflict between Georgia and Russia could disrupt oil supplies in the Caspian regions.

“Energy demand destruction and the dollar return have formed a quiet alliance to bring the oil market down, and today the louder of the two is the dollar,” Peter Beutel, president of trading consultants Cameron Hanover in New Canaan, Conn., told Reuters.

The dramatic drop was ignited by a warning from the European Central Bank on Thursday that high energy costs and more sluggish global growth were finally taking a toll on the 15-nation euro zone, an economy that had seemed remarkably resistant to the turmoil around it for most of this year.

With inflation probably past its peak, most economists now believe the bank’s interest rate increase of July will be its last for the year, and the bank will begin lowering borrowing costs next year. By then, bank watchers believe, the central bank will have firm evidence that inflation, now running at an annual rate of slightly more than 4 percent, will fall back to its informal target of 2 percent.

Since lower interest rates diminish the appeal of euro-denominated assets, the euro tends to edge downward when the prospect of higher interest rates recedes.

“The currency markets had been rewarding hawkish central banks for most of the year, but as inflation becomes less of a concern that sentiment ebbs,” said Simon Derrick, head of currency research at Bank of New York Mellon in London.

On Thursday, in announcing that the bank would hold rates steady, the president of the central bank, Jean-Claude Trichet, acknowledged that the region’s economy was straining under the pressure of high energy prices and slower global growth.

In part, currency experts believe the recovery of the dollar reflects an inevitable swing back from a phase of acute weakness, when every bit of bad news out of the United States — ranging from the collapse of Bear Stearns in March to the bailout last month of the mortgage lenders Fannie Mae and Freddie Mac — seemed to pound it down further.

“At this point, the dollar has fallen a lot,” said Kenneth Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. “Going down sharply further would require a real crisis.”

With a history of resilience, the United States economy now looks like it could skirt a recession, while the odds of Europe enduring one, however brief, have risen measurably in the last month.

The Italian economy, chronically stagnant over the last decade, shrank in the second quarter by 0.3 percent, according to the government data.

Another quarter of decline would mark the country’s fourth recession — defined as two consecutive quarters of negative growth — in a decade.

More bad news appears increasingly likely this coming week in the form of data on growth in Germany and the 15-nation euro area.

Many economists believe the German economy, the engine of the region, may have contracted in the second quarter after blazing ahead by 1.5 percent in the first three months of the year. Much of that growth reflected technical factors like construction projects that will not be repeated. But the European Central Bank said Thursday that the fall-off in growth also stemmed from higher energy prices and cooling demand for German exports worldwide.

“Until now, the severity of Europe’s problems have been outweighed by what happened in the United States,” said Stephen Jen, global head of currency research at Morgan Stanley in London.

Building blocks for Euro bank

The European Central Bank (ECB) in Frankfurt has been celebrating its 10th birthday this year. But as Chris Bowlby discovered, the bank's troubled plans for a new headquarters could be a portent of tricky times ahead.

European Central Bank
The ECB is responsible for the monetary policy of 15 countries

I had expected a grand approach road, rows of expensive cars and smartly suited security guards, but what I first noticed were the rabbits.

Just in front of what I had been told was the Euro Tower - the European Central Bank's main building in the centre of Frankfurt - is a simple park with benches, shrubs and, yes, happily nibbling rabbits.

Was this really it?

A garish plastic sign in the shape of a Euro standing incongruously among the shrubs suggested I had come to the right place.

But as I wandered around the streets at the base of the tower, all I could see was the entrance to a cafe, an amusement arcade with slot machines and what looked like a laundrette.

Then, at last, an entrance of sorts behind swing doors and a little shop advertising itself as a visitor centre.

Anxious memories

Virtually deserted it sold a strange selection of gifts including, for the really keen, the memoirs of the bank's former chief economist, Otmar Issing, and plastic bags filled with what looked to me like bedding for pet animals.

It was, the shopkeeper said, in fact the shredded remains of thousands of bank notes taken out of circulation.


The very modest style of today's Euro Tower continues that tradition of deliberately low-key central banking

He assured me earnestly that such bags were very popular with foreign tourists.

But not, I suspect, with Germans, who have very long and anxious memories when it comes to the destruction of money.

For decades Germany's severe anti-inflationary policy was based on folk memory of the hyper inflation of the 1920s Weimar Republic, which disastrously undermined political and social stability.

Or the years at the end of the Third Reich, when the only valuable currency was cigarettes.

And that anxious memory fed into the deliberately low-key style of post-war German central banking.

The Bundesbank, when it ran the Deutschmark, was always housed in modest offices in a Frankfurt suburb.

Jean-Claude Trichet, president of the ECB
Jean-Claude Trichet has been president of the ECB since 2003

And once when I went to see its former head, Helmut Schlesinger, who lived in a suburban house and often went to work on public transport, he told me he felt most accountable to the residents of his home village in southern Germany.

They would wag their fingers at him when he came to visit and ask: "Helmut, are you still looking after our money properly?"

So the very modest style of today's Euro Tower continues that tradition of deliberately low-key central banking and - whisper it elsewhere in Europe - symbolises what is still a very Germanic monetary policy.

And attempts are being made to pass the policy onto younger generations.

The bank's educational materials feature a trendy young couple, Anne and Alex, vanquishing an ugly inflation monster as they learn that price stability will enable them to buy more CDs.

Economic prospects

This approach worked well in the first 10 years of the European bank's existence as the economic climate has generally been favourable for all Europeans.

But as economic prospects worsen, there is an uneasy feeling that the supposed monetary solidarity that binds the single currency's 15-member states will be tested more severely than ever.

And if the bank itself wanted uncomfortable proof of this new era, it has found it while trying to move up in the property market.


Whatever the bank may say about its anti-inflationary zeal, prices for building materials are shooting up

As I left the visitor centre and its strange souvenirs, I noticed a video screen mounted on a wall with eye catching images of a new sky scraper.

This - the commentary proudly stated - would, in a few years, be the bank's new home.

Following its first successful years there were perhaps some among the bank's multi-national management who felt that a rather more striking HQ was appropriate.

Land was bought - the current Euro Tower is merely rented - and an architectural competition was held.

The Austrian winners, who had clearly been on a central banking course in baffling jargon, promised a multi-faceted building structure with the economical topology of a double slab high rise.

On hold

But what has been far from economical is the cost of trying to build it. When the bank tried to find a builder none came forward with a remotely acceptable price.

Whatever the bank may say about its anti-inflationary zeal, prices for building materials are shooting up.

Major building firms, global players these days, apparently believe that in the current economic climate they will make much more profit in say the Middle East than in Europe.

European Central Bank
The bank is based in Frankfurt, the Eurozone's largest financial centre

So embarrassment all round, as the bank's relocation plans have had to be put on hold.

The Italian and French governments - who like grand public sector projects and favour looser monetary policy to counteract economic downturn - might have advised the bank just to borrow the extra and go ahead anyway.

They like the idea that the European Central Bank is going to become a bit less strict in its policies as Europeans try to weather the current economic storm.

But I suspect that many Germans are quite pleased that whatever the economic weather the bank will remain for now in its modest, reassuring home, with contented rabbits down below, anti-inflationary hawks perched in the offices above.

And Europe's money managed as cautiously and consistently as possible.