ECB leaves interest rates on hold

The widely-expected decision in the 13-member area comes as central banks try to prevent market turmoil from turning into a bigger financial crisis.

Before the recent volatility, caused by problems in the US housing market, rates had been set to rise to 4.25%.

Earlier on Thursday, the Bank of England kept UK rates on hold at 5.75%.

Uncertainty

Central banks in Australia and Canada also decided to keep rates on hold this week.

Explaining the background to the unanimous decision, ECB president Jean-Claude Trichet said the fundamentals of the eurozone economy remained strong but the recent turmoil on financial markets meant policymakers needed to proceed with caution.

"It does seem more likely that rates have peaked"
Steve Barrow, Bear Stearns

"The financial market volatility and reappraisal of risk in recent weeks have led to an increase in uncertainty," he said.

"Given this high level of uncertainty, it is appropriate to gather additional information and examine new data before drawing further conclusions for monetary policy."

Mr Trichet said growth across the eurozone had slowed during the second quarter but that key indicators such as unemployment remained "favourable".

'Right decision'

Before last month's market volatility forced the ECB to pump billions into the eurozone banking system, experts had been expecting it to raise rates one more time this year.

But in line with other central banks, the ECB is now more cautious about the economic outlook because of the credit problems in the US and Europe.

Some believe rates are now likely to stay on hold until the extent of the impact of the US sub-prime crisis on the global economy become clearer.

"The ECB is leaving its options open," said Steve Barrow, from Bear Stearns.

"It has not hoisted the white flag on rate cuts but it does seem more likely that rates have peaked."

Ken Watrett, BNP Paribas chief economist, described the decision as "the right conclusion".

"They want to wait and see and take some time to see what the implications will be in the financial markets and what the long-term consequences will be," he added.

The ECB has raised rates eight times in the past two years as Europe's steady economic recovery has put upward pressure on consumer prices.

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