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European Central Bank holds rates steady

The European Central Bank on Thursday held interest rates steady, an expected move on the central bank's path of gradually tightening policy in response to economic growth.

The European Central Bank held rates at 3.75%, as expected, after a quarter-point hike in March. The ECB sets interest rate policy for the 13 countries that use the euro as their currency, from Germany to Slovenia. The central bank has gradually lifted rates from a low of 2% in December 2005 as the European economy has improved. See more global markets coverage. Surveys of both businesses and consumers, conducted by the Ifo Institute, the European Commission, the French statistics agency Insee and others indicate that Q1 growth in Europe has been solid, with consensus expectations of 2.7% annualized growth Unemployment in the euro area was 7.3% in February, down from 8.2% in February 2006. Inflation at 1.9% is under control, running below the ECB's target of 'close to 2%,' though ECB members are concerned that wage growth, in particular, may accelerate.

More worryingly for the ECB, money supply is growing 10% year-on-year, well above the 4.5% rate the central bank believes is consistent with price stability. The question for ECB watchers is whether the central bank will signal another hike in May. More observers expect that it won't, and will instead opt for a June rate tightening. Analysts at Barclays Capital note the trade-weighted value of the euro is up 1% since its last meeting and 3% since the 2006 average, and the central bank is wary of euro strength given Europe's reliance on exports.

But if ECB President Jean-Claude Trichet uses the phrase 'vigilance' to indicate the bank's views about inflation, markets will interpret that to mean that a hike will be a month away. Recent speeches from ECB officials such as Dutch Central Bank President Nout Wellink have had a hawkish tone. Nonetheless, there aren't many more rate hikes to come. Trichet, for the first time last month, described rate policy in Europe as 'moderate,' rather than 'low.' He gave himself some wiggle room to ratchet up rates beyond 4%, but there aren't any forecasters predicting rates above 4.5% next year. Most economists don't expect interest rates to top 4% in either 2007 or 2008.(marketwatch.com)