FRANKFURT, Germany ? The head of the European Central Bank on Thursday signaled to the markets that interest rate increases will likely be paused for the time being due to heightened economic risks, both in the eurozone and globally.
Bank head Jean-Claude Trichet said that inflation risks are "broadly balanced," dropping his earlier stance that the risk was to the upside. At the same time, he said the eurozone economy was expected "to grow moderately subject to particularly high uncertainty and intensified downside risk."
At a news conference, Trichet turned aside questions about whether rates are on hold, saying "we are never pre-committed, and we stand ready to do whatever is necessary."
But economists say the lower inflation estimate and reduced growth expectations are signs that the bank will not raise rates soon after increases of a quarter point in April and July. Those increases were based on expectations for higher growth and inflation.
The bank left its key interest rate unchanged at 1.5 percent on Thursday as uncertainty grew over the economic outlook, both due to the debt crisis in the 17-country eurozone and weaker global growth.
With prospects for the economy worsening, some experts even think the bank may have to cut rates if Europe's debt crisis takes a turn for the worse. Economists at the Royal Bank of Scotland see a 40 percent chance that the bank will have to slash rates by a half percent by the end of this year.
The European Central Bank has played a key role in fighting the debt crisis by buying Spanish and Italian bonds on financial markets, driving down the interest yields those countries face.
Rising market interest rates have already forced Greece, Ireland and Portugal to turn to other eurozone governments and the International Monetary Fund for bailout loans to avoid defaulting.
But Italy, the eurozone's third largest economy after Germany and France, would be too big for the eurozone's euro440 billion ($618 billion) rescue fund to rescue. Trichet has pressed Italian Premier Silvio Berlusconi to move quickly and cut the country's deficit to reassure bond markets that the country will be able to managed its debts.
Eurozone officials are also pressing Greece to meet deficit-reduction targets to qualify for another round of bailout financing so it can keep paying its bond creditors. Greece is in the midst of a bond swap with private creditors that will cut some of its crushing debt load by exchanging existing bonds for ones with longer maturities and lower interest rates.
Trichet and other eurozone officials are determined to avoid a government default, which could inflict heavy losses on European banks holding government bonds.
That could cause a recession by choking off bank credit to the economy, as happened after the collapse of U.S. investment bank Lehman Brothers in 2008.
Earlier Thursday, the Bank of England also held its monetary policy steady, leaving its key rate unaltered at a record low 0.5 percent as worries about Britain's slack economic performance outweighed concerns about 4.4 percent inflation.
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