LONDON (CNNfn) - The European Central Bank on Thursday opted to hold the line on interest rates, keeping its key borrowing cost at 4.5 percent, as expected. It also used its dollar reserves to buy euros - a move just short of market intervention, to help lift the ailing multi-country currency.|
The central bank last raised its refinancing rate, the amount charged on two-week loans to commercial banks, at its Aug. 31 meeting, opting for a quarter-point increase to both bolster the euro and slow the pace of economic growth. Almost all economists polled in a Reuters survey predicted there would be no rate change this time around.
The rate decision followed a surprise announcement that the ECB has already begun using interest earned on its international currency holdings to buy euros in the open market - a move similar to, but not quite equivalent to market intervention. It was the first time in its 22-month history that the central bank opted to act in any direct way to stimulate demand for the depreciating currency.
Using the interest accrued since the bank began operations in January 1999, the ECB will spend the equivalent of about 2.5 billion ($2.17 billion) supporting the euro in the coming days, the central bank said. It said it informed the U.S. Federal Reserve and the Bank of Japan of its plans.
Euro keeps its gains
The euro rose as high as 87.38 cents following the announcement on the ECB's euro-purchase plan, then settled back to 86.78 U.S. cents after the rate decision. Representatives of the ECB meet every two weeks to discuss the progress of the euro zone economy and the direction of interest rates.
Separately, the European Union said that the economy of the 11-nation euro zone grew 3.8 percent in the second quarter from a year earlier, the fastest pace since records began in 1992. The gain, along with surging oil costs and the falling euro, raised the region's consumer price inflation rate to 2.4 percent in July, according to EU statistic agency Eurostat.
The ECB's interest-rate increase two weeks ago was aimed at heading off inflationary pressures, particularly in a climate of high oil prices and a weak currency. Analysts mostly predict that the ECB will lift rates again before year's end as more evidence of strong growth and quickening inflation emerges.
Both the sagging euro and the surging price of oil have contributed in some form to inflation concerns within the Euro zone. The euro's 26 percent plunge against the dollar since its January 1999 inception has made goods imported into Europe more expensive for consumers, particularly oil, which is priced in U.S. dollars.