ECB holds steady after Bank of England cuts rate

THE European Central Bank kept itself at the crossroads yesterday, holding its key interest rate steady and warning that tension in the markets made it difficult to gauge the economic outlook for the 13 countries that use the euro currency.

The bank has held back from its impulse to raise rates as inflation picks up pace, worried about the effect on the euro-zone of the subprime mortgage debacle that originated in the United States and snaked worldwide.

The Bank of England cut its key rate by a quarter of a percentage point to 5.5 percent yesterday, while the US has been cutting rates as well.

"The economic fundamentals of the euro area remain sound. However, the reappraisal of risk in financial markets is still evolving and is accompanied by continued uncertainty about the potential impact on the real economy," ECB President Jean-Claude Trichet said after the bank's governing council decided to keep the benchmark rate at 4 percent

Most of the "financial market volatility" Trichet cited traces back to the subprime mortgage debacle and worries about the US housing market. US rate cuts have hurt the dollar, which has been setting new lows against the euro and trading around 26-year lows against the pound.

Trichet noted that economic growth in the euro zone was moderating _ expanding at a slower pace in the final three months of this year and likely to continue to do so next year.

The ECB's staff now expects GDP growth of 2.4 percent to 2.8 percent this year, and between 1.5 percent and 2.5 percent next year amid "resilient" global growth.

But Trichet also said that the threat of inflation, including big gains in wages, needed to be watched closely since they could spur second-round effects and push consumer prices higher.

Higher prices for oil and food have led inflation in the euro zone, a bloc of 317 million people that accounts for more than 15 percent of the world's gross domestic product, upwards in recent months. It surged to 3 percent last month, according to a first estimate, its highest point since the currency was introduced into general circulation in 2002 and well above the ECB's guideline of just under 2 percent.

Trichet said the bank expects inflation to remain above 2 percent in the coming months, ranging from 2 percent to 3 percent in 2008 before slipping back to between 1.2 percent and 2.4 percent in 2009. He pledged to "ensure that second-round effects and risks to price stability over the medium term do not materialize."

Trichet said the 19-member governing council debated whether to keep the rate unchanged.

"I have to say that we finally decided on the basis of a consensus, after again having exchanged all views and having weighed very carefully all possibilities," Trichet said, adding that there were "some" voices that favored a hike.

Global Insight economist Howard Archer said any movement on rates may not be in the offing for several weeks, if not months.

"The ECB appears to remain very much in 'wait and see' mode, but there also still appears to be a tightening bias in its policy stance," he said. "At the very least, there does not seem to be any near-term prospect of the ECB joining the ranks of central banks trimming interest rates."

Nearly all the analysts surveyed by Dow Jones Newswires believe the ECB will keep its rate unchanged until the second quarter of next year, with some predicting gradual decreases to as low as 3.5 percent by the end of the year.

Agencies