ECB holds rates and says growth risks starting to grip

By Marc Jones

FRANKFURT (Reuters) - The European Central Bank left interest rates unchanged on Thursday and insisted inflation was still its key fear even though risks to growth were taking hold, prompting markets to scrap bets on rates rising again this year.

ECB President Jean-Claude Trichet said growth in mid-2008 would be substantially weaker than at the start of the year and the central bank had only partially anticipated the scope of the slowdown.

"The latest economic data point to a weakening of real GDP growth in mid-2008, which in part was expected," Trichet said in a news conference after the ECB left rates at a near seven-year high of 4.25 percent.

"We are identifying downside risks since a number of months, and I would say that the information that we had very clearly suggests the materialisation of those risks," he added, citing higher food and oil prices and a global growth downturn.

Last month the ECB raised rates by a quarter percentage point, the first rise in more than a year, and Trichet said that data since then had vindicated this decision.

He confirmed the ECB's stance of "no bias" on monetary policy and no pre-commitment on future rate moves, and said that the current level of interest rates was helping to get inflation back under control.

The biggest change in the ECB's assessment was on the growth outlook, after many indicators dropped to levels last seen in 2003, when ECB rates were at their all-time low of 2 percent and economic growth fell to just 0.4 percent.

Many economists think output has been falling in recent months, and Trichet repeatedly sidestepped questions about whether the ECB now saw a euro zone recession.  Continued...