ECB leaves key rate unchanged at 1.5 percent

August 4, 2011 - 7:30 AM
Europe Interest Rates

FILE - In this July 7, 2011 file photo President of European Central Bank Jean-Claude Trichet gestures during a press conference in Frankfurt, Germany. Fears that Europe's economy may stall and continuing market pressure on indebted governments could force the European Central Bank to abandon a third interest rate increase that had been widely predicted for later this year. (AP Photo/Michael Probst, File)

FRANKFURT, Germany (AP) — The European Central Bank has left its key interest rate unchanged at 1.5 percent as the continent's debt crisis appears to be embroiling Spain and Italy despite efforts by political leaders to contain it.

Market participants are now awaiting ECB President Jean-Claude Trichet's news conference later Thursday, wondering if the ECB will step in and buy Spanish and Italian government bonds to drive down rising borrowing costs that threaten those countries' finances.

The bank has that emergency power, but has not used it for four months and does not like to be seen to support governments, even indirectly. Additionally, Trichet would not necessarily use his press conference to announce them, since the bank makes regular disclosures on any purchases every Monday.

The speculation arises with some European leaders leaving for vacation in August and the head of the European Commission urging faster action. Rising borrowing rates and default fears have already forced Greece, Ireland and Portugal to seek bailout loans and now threaten to pull in Spain and Italy.

Investors and economists will also be looking for clues about whether the bank will carry through on a quarter-point rate hike in October. The move had been widely predicted but is now in doubt because of worries about the economic recovery and the debt crisis.

Higher rates can fight inflation — the bank's primary mission — but could dampen growth in struggling countries and make life harder for consumers there with adjustable-rate mortgages.

The bank must juggle those concerns against an inflation rate of 2.5 percent last month, which is above its goal of just under 2 percent.

As part of a second bailout for Greece aimed at quelling market turmoil, eurozone leaders agreed last month to give Europe's bailout fund, the European Financial Stability Facility, the power to buy bonds and recapitalize banks hit by losses on those bonds.

But the necessary changes will not go through national parliaments until the fall.

The president of the European Union's executive called Thursday on eurozone leaders to consider further changes to the region's bailout fund, including increasing its size.

In a letter to leaders, European Commission President Jose Manuel Barroso urged "a rapid reassessment of all elements related to" the eurozone's bailout fund to make sure it can effectively stop the debt crisis.

Barroso said countries have to speed up the implementation of the fund's new powers.

Many analysts have criticized the leaders' reluctance to boost the size of the euro440 billion ($629 billion) fund, saying that it's not big enough to use the new tools successfully.

The Bank of England also kept its main interest rate unchanged Thursday at a record low of 0.5 percent.

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AP Business Writer Gabriele Steinhauser contributed from Brussels.