FRANKFURT, Jan 15: Euro zone interest rates will have to rise to a more normal level as the economic recovery regains momentum, European Central Bank Governing Council member Axel Weber said on Friday.

In an interview with Bloomberg Television, Weber said the outlook for the 12-nation euro zone had brightened and the ECB would remain vigilant on possible risks to inflation.

If the economic recovery increasingly takes hold, and at the moment we just expect moderate growth, we expect that our historically low rates will certainly have to be led toward normalization, said Weber, who is also president of the Bundes bank.

The ECB left benchmark interest rates on hold at a historic low of 2pc for the 19th month in a row at its meeting on Thursday, as expected. But analysts say a neutral rate for the euro zone is between three and four per cent, allowing for the ECB's aim of keeping inflation below but close to two per cent.

The interview with Weber was recorded on Thursday evening, just hours after the rate decision, but broadcast on Friday. The Bundes bank president noted a pick-up in confidence, although an improvement in Germany at the end of last year has yet to flow through to the rest of the euro zone.

With an accelerating recovery inflationary pressures will arise and that has implications for monetary policy. But at the moment we see no call for action. Weber said a retracing of the sharp rise in the euro so far this year had brought the currency back to levels close to those foreseen by policymakers.

The ECB has forecast growth of about 1.9pc in 2005 based on euro exchange rate of $1.29, up from an expected 1.8pc in 2004. I don't see any reason that the latest currency movements should lead us to change our assessment of the economic situation, Weber said.

He also said the dollar's decline against the euro could also be eased by higher interest rates in the US, now at 2.25pc. A normalization in US monetary policy would brake the fall, along with faster growth rates in the US compared with the euro region.

Weber said it was always important to watch inflation expectations very closely through gauges such as the yields and risk premiums on long-term bonds. You have to be vigilant and do everything you can to ensure that there is no sustained rise in inflation expectations, he said. -Reuters