ECB keeps key interest rate unchanged as bond purchase program, weak euro in focus

ECB keeps rates steady at 1 percent

FRANKFURT, Germany — The European Central Bank left its key interest rate unchanged at 1 percent on Thursday and stressed that its program to buy government bonds to ease the debt crisis is only temporary.

With markets still jittery — the euro has hit a series of four-year lows to trade below $1.19 this week — the decision on interest rates was widely expected. The bank has not adjusted its rate since May 2009.

But the bond purchase program — which President Jean-Claude Trichet had said at last month’s meeting was not an option, only to be adopted days later amid market turmoil — has not been unanimously supported by the ECB governing council.

Trichet stressed at a press conference that “all the nonstandard measures … are fully consistent with our mandate and by construction temporary in nature.”

He said the bank expects the eurozone economy to keep growing “at a moderate pace” in an “environment of continued tensions in some financial market segments and of unusually high uncertainty.”

The ECB chief welcomed actions taken by governments to tackle their budget deficits and highlighted the need for them to stick to their commitments.

Depending on how they are done, bond purchases by a central bank can increase the supply of money in the economy, which can both stimulate growth and cause inflation, undercutting the future value of the euro.

Trichet has earlier said the bond move would not stoke inflation because it “sterilizes” its interventions — that is, it offsets the impact on money supply by other means. So-called quantitative easing, which the Bank of England is doing, aims to increase the amount of money in an economy to make credit more available.

The program “should not be confused with quantitative easing. In simple words: We are not printing money,” Trichet has said.

Still, the purchases are not uniformly supported by governing council members.

Italian Central Bank governor Mario Draghi has said the market intervention “will have to be discontinued as quickly as possible,” while German Bundesbank governor Axel Weber said it is “essential” that possible supportive measures be “strictly targeted and tightly controlled.”

Immediate fears of default have been averted by the European Union and International Monetary Fund’s €750 billion ($900 billion) package of cash and state loan guarantees to protect debt-laden countries in the 16-nation eurozone from bankruptcy. However, the impact of painful austerity measures on growth in future years has hurt the euro and raised worries of a double-dip recession.

Europe’s leaders say the euro rescue package must be backed up with drastic austerity measures to get debt under control — and shore up credibility in the fundamental rules that govern their 11-year-old currency.

Also weighing on the euro have been predictions that the bank will wait well into 2011 before raising its key interest rate from the current record low of 1 percent.

Those low rates can weigh on the euro’s exchange rate by reducing return on euro-denominated investments — especially if rates go up first in the United States as its economy recovers.

Earlier today, the Bank of England also left its base interest rate at a record low of 0.5 percent for the 16th consecutive month on Thursday as the British economic recovery remains fragile and public spending cuts are expected to hamper future growth.

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Associated Press Writer Melissa Eddy contributed to this report from Berlin