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UPDATE: European Central Bank Holds Steady Amid Market Turbulence

By Steve Goldstein

LONDON (Dow Jones) -- The European Central Bank, on a day in which it injected $57 billion (42 billion euros) into the banking system, held interest rates steady Thursday, opting to wait for markets to settle down before a further rate tightening.

The ECB, which sets interest rates in the 13 countries that use the euro as their currency, kept rates at 4%, as economists had increasingly expected following a rocky August in debt and equities markets.

Jean-Claude Trichet, the ECB's president, said the central bank needs to gather more data before making further conclusions.

"We have a high level of uncertainty," the central banker said at a press conference.

The European Central Bank had never before held interest rates in the month after Trichet had declared that the ECB was watching monetary developments with "strong vigilance." The ECB has been gradually raising rates from the level of 2% since December 2005.

But Trichet has always insisted that the central bank never "pre-committed" on interest rates.

And he still maintained a somewhat hawkish posture on Thursday, saying how important it was to anchor inflationary expectations and that rate policy was still "accommodative."

"The dis-anchoring of inflationary expectations would be the worst thing to do in the current situation," he said.

But Trichet didn't repeat the phrase "strong vigilance" as he did in August.

In response to spiking overnight and three-month rates that banks lend to each other, the ECB has been pouring billions of euros into the banking system, including Thursday's one-day tender operation.

Trichet said he was "very proud" of those actions and made pains to differentiate between the money markets in the short term and monetary policy for the longer term.

"The market has to function at whatever rate," Trichet said.

Overnight euro rates at least on Thursday did come down in response to the ECB's actions, though three-month rates weren't moved, according to data from the British Bankers Association.

Trichet said market volatility was down to a lack of transparency -- as was the case in the Asian crisis, he noted.

(END) Dow Jones Newswires

September 06, 2007 09:56 ET (13:56 GMT)


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