European banks hold rates steady

The Bank of England and the ECB announced Thursday they are keeping key interest rates steady.

LONDON (AP) -- The European Central Bank left its interest steady at 4% on Thursday, following a similar decision by the British central bank to leave its rate at 5%.

ECB president Jean-Claude Trichet will present the bank's rationale for leaving the rate for the 15-nation euro zone at 4% - where it has stood since last summer - when he meets with reporters in the Greek capital.

Analysts had expected Thursday's decision by both banks as evidence mounted that growth in the euro zone and in Britain is likely to slow in coming months.

Higher rates, used to combat inflation, also can strengthen a currency and are considered to be supporting the euro.

While the U.S. Federal Reserve has lowered rates seven times in seven months to 2%, the ECB has been content to stand pat to try to combat rising inflation in the bloc of 317 million people, which accounts for 22% of global gross domestic product - more than Japan and China and below the U.S. at 27%.

"While the U.S. economy has succumbed to stagnation and the U.K. economy is decelerating sharply, the euro zone has so far held up fairly well," said Holger Schmieding, Bank of America's chief European economist. "For the time being, that is until the summer break ends in September, the ECB is probably firmly on hold," he said.

In London, the Bank of England shied away from back-to-back trims despite slowing economic growth.

The decision to keep rates on hold was anticipated by most analysts after the bank's monetary policy committee made a quarter of a percentage point cut last month. The bank had to balance its decision with concern about inflation that remains above target levels.

"Current elevated inflation levels and risks deterred the MPC from cutting interest rates for a second successive month in May despite mounting signs that the U.K. economic downturn is deepening and widening amid ongoing tight credit conditions," said Global Insight economist Howard Archer.

Chiara Corsa, a UniCredit economist in Milan, said that the BoE was "well aware that, against the backdrop of tighter credit conditions, growth momentum will definitely lose steam."

It's a similar quandary for the ECB now that inflation in the euro zone has slipped back to 3.3% in April from 3.6% in March - still well above the ECB's own guideline of just under 2%. The bank is also pointedly concerned about the fluctuation in exchange rates, including the record setting euro, and what it may portend for future economic stability.

The euro reached a record $1.6018 on April 23 after a pair of ECB governors said that high inflation could cause the bank to raise interest rates. They quickly backed off the assertion and the euro has since slid to around $1.55 this week.