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ECB leaves key rate at 0.75 percent

Thursday - 4/4/2013, 9:50am  ET

FRANKFURT, Germany (AP) -- The European Central Bank has left its key interest rate unchanged at a record low of 0.75 percent, holding off on further stimulus for the euro area's slack economy -- despite signs that a hoped-for recovery may be delayed.

Markets are now waiting to hear ECB President Mario Draghi's views at his regular monthly news conference, which follows the rate-setting meeting of the bank's 23-member governing council at its headquarters in Frankfurt, Germany.

The central bank for the 17 European Union countries that use the euro currency has said it expects a gradual recovery in the eurozone's economy later this year.

Yet recent data has raised doubts. Surveys of services and manufacturing purchasing managers suggest the region's economy shrank in the first quarter of 2013 -- the sixth time it has fallen in a row. Unemployment is at 12 percent, the highest since the euro currency union was formed in 1999.

The benchmark refinancing rate is what the ECB charges banks to borrow from it and so influences how lenders charge companies to borrow, expand production and hire people. So a cut, in theory, would help the economy grow.

Additionally, inflation is low at an annual rate of 1.7 percent, below the bank's target of just under 2 percent. That leaves the bank free to cut if it wants, since there's little fear that lower rates could stoke inflation.

Yet bank officials have held off, and indicated a rate cut might do little additional good.

They worry that the current low benchmark rate is not being passed on to companies because of troubled bank finances in heavily indebted eurozone countries. Instead of cutting the main rate, the ECB has tried to address that by letting banks borrow all they want at its regular credit offerings.

Lending also remains weak because companies and consumers often see no reason to risk borrowing in a slack economy.

The Bank of England also left its key rate unchanged Thursday at a record low 0.5 percent. But, in an attempt to end years of crippling deflation that has killed off growth in Japan, the country's central bank startled markets Thursday by saying it would aggressively step up measures to increase the supply of money in the economy and push inflation up to 2 percent.

Draghi will also likely be asked his views about the bailout loan being given to Cyprus by the other eurozone governments and the International Monetary Fund. The bailout ruffled markets after a first proposal included losses for all savers in Cyprus's banks -- including those with deposits less than 100,000 euros, an amount that's covered by Europe's deposit insurance. That idea was withdrawn, leading to a weeklong scramble to come up with another plan that spared smaller savers.

The Cyprus turmoil however has not reawakened the eurozone's debt crisis, which was marked by dangerously high borrowing costs for indebted countries such as Spain and Italy due to fears they might default on their debts.

The ECB calmed markets after Draghi said last year it would "do whatever it takes" to preserve the euro and the bank followed through in September with an offer to buy the bonds of indebted countries on the open market.

The ECB has yet to buy any bonds under the offer. But the mere proposal has lowered bond market borrowing rates and given troubled countries more time to straighten out their finances.


Copyright 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.