ECB leaves interest rates unchanged

The ECB hasn't changed interest rates since July 2012

LONDON (CNNMoney)

The ECB held its key rate at 0.75%, where it's been since last July, when the eurozone was in the grips of a sovereign debt crisis that threatened to tear the common currency apart.

Since then, the bank has pledged to backstop ailing eurozone countries, and market confidence has returned -- helped by painful economic restructuring introduced by governments in Athens, Rome, Madrid and Lisbon.

Only a small minority of economists were predicting a rate cut, arguing that last month's chaotic Italian election and the darkening economic outlook could sway the ECB.

Italy's protest vote against harsh spending cuts and tax increases left the eurozone's third-largest economy in political deadlock, and showed that market confidence remains fragile. Italian government bond yields shot up after the inconclusive election result, although they have eased back in recent days.

The eurozone economy shrank by 0.6% last year and both the ECB and the European Commission expect it to contract by 0.3% this year. The ECB is due to update its forecasts later Thursday.

Related: Eurozone economy to shrink again in 2013

Inflation has fallen to 1.8%, in line with the ECB's target, and is projected to weaken further this year. Unemployment hit a new peak of 11.9% in January.

Earlier, the Bank of England also shrugged off pressure to inject more cash into the stagnant U.K. economy. It held interest rates at their record low of 0.5%, a level that hasn't changed in four years, and kept its £375 billion bond buying plan unchanged.

Last month, Governor Mervyn King and two colleagues on the monetary policy committee backed further monetary stimulus but were outvoted.

The world's sixth-largest economy risks falling back into recession for the third time since the financial crisis of 2008 after its gross domestic product shrank by 0.3% in the final quarter of last year.

With the U.K. government sticking firmly to a path of austerity, some analysts had expected the bank to provide an additional dose of stimulus this month, despite mixed signals on the health of the economy.

Poor growth prospects for the U.K. prompted Moody's to remove its AAA credit rating last month. Government cuts, falling incomes and the eurozone recession are depressing activity. And wages in the U.K. fell faster in real terms than in any other major developed economy between 2007 and 2011, according to a new study.

Prime Minister David Cameron said Thursday his government was sticking to its austerity program despite pressure from some members of his coalition for a greater emphasis on growth rather than debt reduction.

The Bank of England has already bought £375 billion of government bonds, providing a much bigger stimulus relative to the size of the economy than the Federal Reserve's quantitative easing scheme.

First Published: March 7, 2013: 8:21 AM ET

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