European Central Bank holds rates firm

/ Source: The Associated Press

The European Central Bank left its key interest rate unchanged at 2 percent Thursday as it waits for signals that the continent's hesitant recovery has built up more strength.

The decision by the bank's 18-member governing council, meeting in Frankfurt, was widely expected by economists. The key refinancing rate, which sets the cost of central bank credit to commercial banks, has stood unaltered since June 2003.

The move was mirrored by the Bank of England, which kept its key rate unchanged at 4.75 percent. Britain has not adopted the euro currency and therefore has its own interest rate policy.

ECB President Jean-Claude Trichet has said Europe's moderate recovery is continuing on the back of a growing world economy. But there have been enough worrying signs about growth in the 12 countries that use the euro to make the bank put off its next expected move, a rate increase to ward off inflation as the recovery picks up.

Trichet continued his upbeat tone at a central bankers' meeting in Basel on Monday, saying the worst effects of high oil prices — which can dampen growth — "have already been absorbed."

Growth in the euro countries slowed to 0.3 percent in the third quarter from 0.5 percent in the previous three months, while more recent data also raises worries. Manufacturing orders in Germany, Europe's biggest economy, dipped in November, and unemployment there rose to 10.8 percent in December.

Other signs — such as Tuesday's ZEW Institute survey of the outlook among German finance professionals — have pointed up.

Meanwhile, euro-zone inflation ran at 2.3 percent in December, above the bank's guideline of below but close to 2 percent. The bank expects inflation to fall this year, however, and it's the forecast rather than past data that weight more heavily since rate moves take months to have an effect.

With indicators mixed, the bank has to juggle fears about inflation and growth; cutting rates — the equivalent of stepping on the accelerator — can help growth but worsen inflation.

Rate increases are tough medicine against inflation, but can kill off growth and jobs by raising the costs of borrowing for businesses.

One of the chief worries for the European economy is the euro's rise against the dollar, which hurts European exporters by making their goods more expensive in comparison to those of foreign competition.

But the stronger euro also eases the effect of higher oil prices because oil is priced in dollars; that takes away much of the adverse effect on growth and inflation and gives the bank more room to wait.