Tax cuts aimed at offsetting the impact of high fuel prices must be balanced by other measures to ensure that strict budgetary discipline is maintained, the president of the European Central Bank (ECB), Mr Wim Duisenberg, has warned.

Speaking in Frankfurt yesterday after the ECB's Governing Council left interest rates unchanged at 4.5 per cent, Mr Duisenberg said that the recent increase in oil prices meant a loss of real income for the euro zone economy.

"The loss of real income cannot be avoided for the economy as a whole. Attempts to shift the burden of this loss within the economy will risk endangering the continuation of a non-inflationary growth process," he said.

Mr Duisenberg did not explicitly criticise the tax cuts agreed by the French government in response to protests by hauliers and other groups affected by high fuel prices. And he said he understood that governments wanted to alleviate the pain felt by those sectors most vulnerable to the price rise. But he said that concessions to one group or another could not eliminate the loss in real income to the economy as a whole.

"It has to be judged against the long-term goals of fiscal policy. I leave it to national governments to come to that judgment," he said.

The euro enjoyed a brief rally on foreign exchange markets earlier in the day after the ECB sold all the interest earned on its foreign exchange reserves over the past 18 months. Mr Duisenberg insisted that the move, which he said was common practice for central banks throughout the world, did not represent an attempt to boost the euro through market intervention. But he admitted to feeling pleased about the effect it had on the exchange rate.

Mr Duisenberg said that the ECB would repeat the exercise at regular intervals, a remark that led some market analysts to conclude that the bank is gearing up towards a full-scale intervention on behalf of the euro.

The ECB president predicted that the markets would reverse their current trend away from the euro and repeated that the exchange rate did not reflect the underlying strength of the euro zone economy.

"At present, inflation in the euro area is among the lowest in the world. The fact that the euro has continued to depreciate over recent months is not in line with the strong economic fundamentals in the euro area. Recent global exchange rate developments are also not in line with international balance of payments positions. Our concerns on this issue remain serious and we shall monitor developments closely," he said.