ECB takes flak on rates as France takes EU helm

By Brian Love

PARIS (Reuters) - The European Central Bank faced renewed pressure to think twice about raising interest rates as France took over the EU presidency for six months on Tuesday, with Nicolas Sarkozy leading the charge.

The euro currency's exchange rate was way too strong and ECB interest rates could not fix inflation caused by soaring oil and other commodity costs, French President Sarkozy said in an overnight television interview.

"Today's inflation ... is caused by exploding commodity prices so don't try to tell me rates must rise to fight inflation," the French leader said when discussing his plans for France's presidency of European Union affairs.

"You can double, triple interest rates and that will not bring a decrease in the price of a barrel of Brent."

German Finance Minister Peer Steinbrueck followed up with an appeal to the central bank to take account too of the threat to growth from an interest rate rise that would bring no quick fix to inflation.

Inflation hit a record annual rate of 4.0 percent in the euro zone in June, according to official estimates and the ECB is widely expected to raise its key policy rate to 4.25 percent from 4.0 when it meets on Thursday.

"Inflation is a problem ... but there are no short-term solutions," Steinbrueck said during a stock exchange event in Frankfurt..

"The ECB should consider which effects an interest rate rise would have on economic growth," he said.

RECESSION TENSIONS

While ECB chief Jean-Claude Trichet is no stranger to salvos from Paris, some officials had suggested in recent days Sarkozy would tone things down a notch while France sought to steer the 27-nation union past numerous other hurdles in coming months.

How hard that job will be beyond the realm of economics was made clear on Tuesday when Polish President Lech Kaczynski said he would not for now sign the European Union's reform treaty, a pact already rejected by Irish voters in a referendum.

While soaring food and fuel prices have driven inflation to record levels in the 15-nation euro zone and the wider EU bloc of 27 countries too, the outlook for economic growth is also darkening, making ECB rate moves ultra-sensitive.

France, Spain and Germany have all said in recent days that second quarter economic growth in their countries, for which official data are not yet available, will show slowdown.

Denmark, which along with Spain and Ireland had one of the biggest housing booms of Europe in recent years, said on Tuesday its economy contracted in the last quarter of 2007 and the first quarter of 2008 -- in essence a recession.

In his overnight television interview, Sarkozy said the euro exchange rate was overvalued by a penalizing 30 percent versus the dollar.