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Last Updated: Thursday, 3 February, 2005, 12:51 GMT
Euro rate freeze stays in place
A euro note held in front of the European Central Bank in Frankfurt, Germany
The ECB is keen not to snuff out Europe's sputtering recovery
The cost of borrowing money in Europe has remained at 2% for the 20th month in a row.

The European Central Bank (ECB) announced its widely-expected decision to maintain the rate on Thursday.

The standstill reflects slow European growth and stubbornly high levels of unemployment, most notably in the giant German economy.

But it contrasts sharply with the US, which increased rates on Wednesday for the sixth straight month.

The quarter-point rise took US rates to 2.5%, and the Federal Reserve - the US's central bank and rate-setting body - promised more moves at a "measured pace" through 2005.

The target is expected to be 3.5%-4%, with future decisions trying neither to stifle growth - currently running above 4% a year - or fuel inflation.

Up or down?

However, the ECB's rate freeze could be near an end, since there are some signs that growth may finally be picking up speed in Europe.

Federal Reserve chairman Alan Greenspan

The cost of borrowing in the 12 nations which use the euro as their currency is still seen in some quarters as too high, however.

Germany in particular is thought to need looser monetary policy, after its jobless total was revealed to have reached five million earlier this week despite recent labour reforms, while inflation there seems under control.

The ECB is often criticised for being slow to respond. In the aftermath of the 9/11 attacks in 2001, for example, it moved more cautiously than either the US Fed or the Bank of England.

Both the US and UK banks moved to increase rates in 2004, reflecting solid economic growth, although UK borrowing costs have been held recently at 4.75%.

Currency movements

The disparity in interest rates could help offset the downward pressure on the dollar.

The US currency has spent recent months heading lower as investors eyed huge US public sector and current account deficits, worrying how long the rest of the world would be prepared to underwrite them.

The euro soared to record levels of more than $1.30 by the end of 2004.

A bigger interest rate gap might help make the dollar more attractive as an investment.

Fed increases US interest rates
02 Feb 05 |  Business
ECB holds rates amid growth fears
13 Jan 05 |  Business
ECB chief laments dollar's fall
27 Nov 04 |  Business
Q&A: Why the dollar's in decline
22 Nov 04 |  Business
ECB keeps eurozone rates on hold
07 Oct 04 |  Business

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