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ECB Leaves Interest Rate Flat at 4%

The European Central Bank left interest rates unchanged at 4 percent on Thursday amid continuing uncertainty regarding the outlook for the economy.

The ECB's decision was widely expected, with all 71 analysts in a recent Reuters poll predicting the bank will stand pat.

"The economic fundamentals of the euro area are sound," ECB President Jean-Claude Trichet said, adding that profitability was sustained, employment growth was robust, and unemployment was low.

"We will continue to monitor very closely all developments over the coming weeks," Trichet said.

The euro fell slightly against the dollar after the decision, a sign that some dealers were hoping the bank's hawkish speeches to be followed by facts. But it later held ground.

A de facto tightening of monetary policy is already taking place, because of the strong euro and the still-jittery money markets, analysts said.

"We already had a significant spread between the inter-bank rate and the re-financing rate, which might serve as a necessary rate rise in times of inflation," Ansgar Belke, professor for macro economics at University of Duisburg-Essen, told "Power Lunch Europe."

Hawkish Talk

As expected, Trichet's speech was hawkish and he called on decision makers in the 15 countries of the euro zone not to "engage in a spiralling" of inflation.

"We call upon them to behave properly...and we will see what happens," Trichet said.

In France and in Germany demands for wage hikes grow louder and louder, while in Italy workers have asked for tax cuts to make up for rising inflation and stagnating salaries.

"The governing council remains prepared to act … so that second-round effects (of inflation) do not materialize," Trichet said.

The ECB decided together with the Federal Reserve to offer further liquidity injections to ease money market tensions in January, in operations of the same size and the same procedures as in December last year, Trichet added.

Many in the market hope the uncertainties regarding when will the credit crunch end will be dissipated by banks' annual reports, but Trichet said the ECB was not convinced that "dust will settle" when the accounts are published.