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ECB holds rates despite French concerns

Feb 07 2013 17:00 AFP

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Frankfurt - The European Central Bank held its key interest rates unchanged at its policy meeting on Thursday despite French concerns that the euro's recent strong rise could pose a threat to economic recovery.

As widely predicted by analysts and ECB watchers, the central bank's policy-setting governing council voted to leave the main refinancing rate at a historic low of 0.75%, where it has been since July.

ECB president Mario Draghi is scheduled to explain the reasoning behind the decision at his usual post-meeting press conference.

Analysts said that with no new policy moves expected, attention is likely to focus on the euro which late last week rose to its highest level against the dollar in more than a year.

Newedge Strategy analyst Annalisa Piazza said she expected Draghi to remain cautious about the outlook for growth, despite rising confidence across the euro area, because "the good news coming from rising business confidence might be offset by negative effects of a stronger euro."

Jennifer McKeown at Capital Economics said Draghi would likely shrug off questions about the potential impact of the strong euro.

"All-in-all, the message is likely to be that the ECB is happy for now to remain on the sidelines," she said.

The central bank always insists it has no exchange rate target.

And analysts say Draghi will likely reiterate the stance of the Group of 20 (G20) nations which said in November that they remain committed to "more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals."

Nevertheless, France has triggered a debate this week that a strong currency could trample the still tender green shoots of recovery in the euro area, even as Germany insists there is no cause for alarm just yet.

On Tuesday, French President Francois Hollande called for the eurozone to manage the euro's exchange rate.

Speaking before the European Parliament in Strasbourg, Hollande said "a single currency zone must have a foreign exchange policy otherwise it will see an exchange rate imposed on it (by the markets) which is out of line with its real competitive position."

But Berlin says there is no cause for concern, arguing that from an historical point of view, the euro is currently not overvalued and that the recent rise is a counter-reaction to the massive depreciation in the wake of the eurozone crisis.

German officials argue that the euro's rise is a good thing since it shows that financial markets' confidence in the single currency is returning.

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