updated 2/5/2004 8:19:53 AM ET 2004-02-05T13:19:53

The European Central Bank kept its key interest rates steady Thursday and economists say it will likely keep them unchanged until late in the year unless a further steep drop by the dollar threatens Europe's budding recovery.

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

The ECB has signaled that rates will likely be on hold for months as it waits for the economies of the dozen countries using the euro to gain speed. Most economists think its next move will be to raise rates to prevent inflation as the economy heats up.

None of the 24 economists surveyed by Dow Jones Newswires this week expected a cut Thursday — but 13 predicted the bank would raise rates by year's end.

A sudden plunge by the already weak dollar is seen by many as the main risk to the bank's current outlook. An overly strong euro could hurt European exports, by making them more expensive, and threaten the recovery.

Bank President Jean-Claude Trichet helped halt the euro's worrisome rise last month by expressing concern over "brutal" exchange rate shifts — seen as a first warning to currency markets that the bank might intervene.

Meanwhile, the Bank of England said Thursday it raised Britain's benchmark interest rate by a quarter percentage point to 4 percent.

The rate hike is the bank's second in three months, and it comes amid concerns that a strengthening in the economy might ignite inflation.

The Bank of England last increased the rate — also by a quarter of a percentage point — in November 2003 to 3.75 percent.

That was the first hike in the base rate since February 2000, when it stood at 6.0 percent. Rates eventually dipped to 3.5 percent, the lowest in 48 years.

The base rate is what the Bank of England charges on loans to commercial lenders. Commercial banks and lenders use it as a guideline for loans to businesses and individuals.

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 This material may not be published, broadcast, rewritten or redistributed.

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