updated 1/8/2004 10:50:08 AM ET 2004-01-08T15:50:08

The European Central Bank left its key interest rate untouched Thursday, even as a soaring euro made some economists worry about prospects for growth in the 12 countries that use the currency.

The bank's 18-member governing council left the refinancing rate at 2 percent, where it has been since a half-point cut in June.

The Bank of England also left its benchmark lending rate unchanged Thursday at 3.75 percent.

The European Central Bank's decision was widely expected, shifting the attention to any statements that bank President Jean-Claude Trichet might make afterward on the euro, which hit an all-time record of $1.2812 on Tuesday.

So far Trichet has not expressed great concern that the stronger euro will hurt the economy by dampening exports, and put pressure on the bank to cut rates. But the rally has quickly outrun many economists' predictions and raised questions about what the bank thinks now.

The bank's potential quandary is this: It's already cut interest rates to near rock-bottom levels, but the stronger euro could hurt growth by making European exports more expensive compared to competing goods from foreign producers. A rate cut could provide economic stimulus.

The bank's main goal, however, isn't growth but curbing inflation, which could be worsened by a cut at the wrong time. And its inflation projection for next year has crept up from around 1.3 percent to around 1.8 percent.

In December, inflation was proceeding at an annual rate of 2.1 percent, just above the bank's guideline of 2 percent.

Commerzbank economist Michael Schubert said that rates will stay right where they are so long as the bank has a wary eye on inflation down the road.

"It's just more likely that we'll stay on hold for a longer period than originally expected because of the strongly appreciating euro," Schubert said. "Everyone is surprised by the euro-dollar momentum but what counts for the ECB is inflation expectations."

He said Trichet would likely not say much in an attempt not to roil markets. "He will be very cautious," said Schubert.

Economists and traders will be waiting to see whether the ECB will try to talk down the euro by hinting at an intervention _ selling some of its foreign currency reserves in an attempt to influence the exchange rate.

An intervention that didn't slow the euro's climb might backfire by emboldening speculative sellers even more, Schubert said. While one "cannot be ruled out," Schubert said that "I don't think an intervention would be a success at the moment."

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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