European Central Bank Keeps Interest Rates on Hold

The European Central Bank has left its benchmark interest rate unchanged at a record low of 0.25 per cent amid growing signs that the economic recovery in the 18-country eurozone is gaining momentum.

The bank's 24-member rate-setting council made the decision Thursday at a meeting in Brussels.

A rate cut could give growth a small boost in theory by lowering borrowing costs for banks and companies. It could also help lower the euro, which is near a 2-and-1/2 year high against the dollar at around $1.395. A weaker euro would help exporters and boost inflation, which at an annual 0.7 per cent is well under the bank's 2 per cent goal.

The euro was little changed after the decision, trading at $1.3945 15 minutes after the announcement at 1145 GMT.

Surveys of purchasing managers and other indicators have suggested that the eurozone economy is picking up steam. Unemployment has fallen slightly but remains high at 11.8 per cent. The European Commission, the EU's executive arm, predicts 1.2 per cent growth this year, though inflation is expected to remain weak for some time.

Low inflation makes it harder for people and governments to reduce debt. There have also been worries about deflation, an extended drop in prices that can cripple growth by pushing consumers to delay purchases in hopes of bargains.

Investors are waiting to hear ECB President Mario Draghi give his outlook at a post-decision news conference. Draghi has emphasized that the bank is ready to take action in case the economic outlook worsens.

A cut in the benchmark rate would lower the cost to banks of borrowing money from the ECB and other banks, and in theory they could pass that lower rate on to businesses and consumers. But that might only have a small effect. Rates are already very low, and some banks are not passing on lower rates because they have financial troubles of their own.

Analysts think the ECB might take other steps to boost inflation. One measure that has been discussed is a negative interest rate paid on money banks deposit at the ECB, which could push them to lend and help lower the euro further. Currently the rate is zero.

The ECB could also start buying bonds in the secondary market to boost the supply of money in the economy and drive down longer-term rates. The U.S. Federal Reserve, Bank of Japan and Bank of England have all done that. But that step, though permitted by the ECB's mandate, faces serious obstacles given there are 18 different government bond markets in the eurozone.