European Central Bank keeps rates steady

FRANKFURT, Germany -- The European Central Bank kept its main interest rate unchanged at 4.25 percent Thursday as it waited to see how the U.S. terror attacks affect the world economy.

The decision to hold steady was expected after bank President Wim Duisenberg appeared to rule out a rate decrease a day earlier, saying a quick cut in the wake of the disaster "would rather have inspired a reaction of panic than of stability and calmness."

The bank made no comment on the interest decision, but said that "the fundamental strength and resilience of the U.S. economic system will not be impaired by recent events."

ECB's policy-making committee cut its key lending rate a quarter-point from 4.5 percent just two weeks ago, only its second rate cut this year. The bank has maintained a tough stance on bringing down inflation, even as the world economic slowdown saps growth across the continent.

Rushing to calm investors and stabilize Europe's financial system, the bank on Wednesday and Thursday offered cheap short-term credit to commercial banks, forcing overnight money market rates back down from over 5 percent in the wake of Tuesday's attacks in New York and Washington.

While the bank said that "the expectation is that normal market conditions will prevail in the period ahead," it added that it would continue to monitor developments and "take action if necessary."

Banks coordinating

The ECB said it was coordinating its actions with those of the U.S. Federal Reserve and other central banks.

Duisenberg said Wednesday that interest rates are currently "appropriate" to its goal of bringing inflation below a self-imposed 2 percent ceiling.

Inflation in the countries using the region's common currency, the euro, fueled earlier this year by higher energy and food prices, has been easing from an eight-year peak of 3.4 percent in May. By July, it had fallen to 2.8 percent.

The ECB has offered assistance to the United States, raising speculation that central banks worldwide might intervene in currency markets and coordinate interest rate cuts in the weeks to come to head off the threat of a global recession.

Interest rates are the European bank's main tool for controlling inflation in the 12 European Union nations using the euro.

By raising its rate, the bank can discourage borrowing and dampen the risk of inflation. By lowering it, the bank makes loans cheaper as a way of stimulating the economy, encouraging companies to borrow and expand.