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European banks hold rates steady

September 07, 2007|From Bloomberg News

The European Central Bank and the Bank of England left their key interest rates unchanged Thursday, putting anti-inflation campaigns on hold while seeking to calm markets roiled by the collapse of sub-prime mortgages in the U.S.

Hours before its interest-rate decision, the European bank, which serves as the central bank for countries that use the euro, pumped $57.7 billion in cash into the financial system to reduce borrowing costs that had reached their highest level in six years Wednesday.

Jean-Claude Trichet, president of the Frankfurt-based bank, had signaled Aug. 2 that rates needed to go up to keep a lid on inflation. Just three weeks ago, most economists predicted the central bank would lift its benchmark rate Thursday.

Instead, as more recently expected, euro-zone policymakers kept the rate at 4%.

"Financial-market volatility and reappraisal of risks over recent weeks have led to an increase in uncertainty," Trichet said at a news conference Thursday in Frankfurt. "Given this high level of uncertainty, it's appropriate to gather additional information before drawing conclusions" on monetary policy.

"They have to assess whether the financial-market turmoil will change the otherwise fairly optimistic economic situation," said Holger Schmieding, chief European economist at Bank of America Corp. in London.

Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt, said the central bank had a dilemma. "Economic fundamentals require at least one more rate increase, and inflation concerns haven't eased," he said. "On the other hand, it needs to deal with market turbulence."

The Bank of England kept its benchmark rate at 5.75% and said it was "too soon to tell how far the disruption in financial markets would impair the availability of credit to companies and households." It noted "tentative signs" that consumers were spending less.

"At whatever price, at whatever interest rates, the market has to function," Trichet said. "The functioning of the market -- the money market, the commercial-paper market -- is significantly hampered by an absence of confidence."

The Federal Reserve added $31.25 billion to the U.S. banking system Thursday, the most in almost a month, pushing the overnight lending rate below the central bank's target of 5.25%.

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