ECB Holds Rates Steady, Chooses to Indirectly Support Euro

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BERLIN -- As expected, the

European Central Bank

held interest rates steady on Thursday, but indirectly showed support for the flagging euro.

While the bank did not signal any direct intervention in currency markets, it did announce that it would sell $2.15 billion of foreign currency. The bank said in a statement that this was simple management of its foreign currency reserves -- disposing of dollar- and yen-denominated interest it had earned on reserves.

The move was seen as intervention by proxy and helped boost the euro this morning. After the announcement, the currency was slightly higher at $0.8686.

Still, the lack of an interest-rate hike signalled that Europe's monetary authorities aren't yet concerned about inflationary pressures that have likely increased due to the plunging euro. The ECB will continue to hold its refinancing operations as a variable-rate tender with a minimum bid rate of 4.50%. The bank's Governing Council had been expected to keep rates steady after hiking euro-area borrowing costs by a quarter of a percentage point only two weeks ago.

However, after that increase the euro tumbled to historic lows against the dollar, prompting speculation the ECB will have to ratchet rates higher more quickly than had been previously expected to contain inflation. As the euro sags, dollar-denominated goods such as oil become more expensive, raising the risk of importing inflation.

Still, euro skeptics believe the bank will have to act again on rates, despite more tentative moves such as the reserve sales."The ECB is nowhere near the interest-rate peak," claims Catherine Lee, a

Royal Bank of Scotland

economist. She believes rates will have to go higher to counter "the euro's extended weakness and stubbornly high oil prices," with another 50 basis-point increase coming before year's end.

Just when the next rate move will come is at the moment unclear, but the longer the euro wallows versus the dollar, the quicker it is sure to come.

The ECB sets monetary policy for Germany, France, Italy, Spain, Portugal, the Netherlands, Belgium, Finland, Luxembourg, Ireland and Austria.