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Eurozone interest rates steady

/ Source: Financial Times

The European Central Bank decided to keep interest rates on hold at its monthly meeting - its first under the leadership of Jean-Claude Trichet. The decision came despite a quarter -point rise in U.K. rates.

The ECB said on Thursday it would keep its main refinancing rate at 2 per cent, a decision widely expected by financial markets. In a statement, Mr. Trichet said: “We anticipate some further stickiness of inflation rates in the shorter term, but the medium term outlook for price stability remains in our eyes favorable.”

The announcement followed an unexpected rate rise by the Australian central bank on Wednesday, and the Bank of England’s decision on Thursday to raise its key repurchase rate to 3.75 per cent from 3.5 per cent.

The ECB last eased policy in June. Since then, economic indicators have suggested the eurozone economy may have slowly improved in the third quarter.

But economists cautioned against expecting any sharp resurgence in the eurozone given that at least three of the members of the 12-nation bloc were in recession in the second quarter, when eurozone GDP as a whole fell 0.1 per cent.

Germany, Italy and the Netherlands all suffered two quarters of contracting GDP - the technical definition of a recession - in the first half of the year.

Data this week on manufacturing and service sector activity however, supported hopes for a pick-up and firmed beliefs the bank’s easing cycle had ended. Manufacturing expanded at its fastest pace in more than a year while service sector activity grew by its highest rate in almost three years.

Economists said market interest in Thursday’s meeting was likely to focus on the upcoming press conference, the first chance for Mr. Trichet to air his views.

“With the economic backdrop continuing to improve in the US and, albeit more slowly, in the eurozone, and inflation benign it seems the ECB will have a number of areas to discuss,” said analysts at ING Financial Markets.