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ECB chief signals pause in interest rate hikes
ECB chief Trichet says inflation risks "balanced", signalling pause in rate hike campaign
By The Associated Press

FRANKFURT, Germany (AP) ' The head of the European Central Bank says there is less risk of inflation in the months ahead, a signal to the markets that the interest rate increases will probably be paused.

Bank head Jean-Claude Trichet said Thursday that inflation risks are "broadly balanced," dropping his earlier stance that the risk was to the upside.

Meanwhile, he says there are "intensified downside risks" to the economy.

Leaders in the 17-country currency union are struggling to contain a crisis over too much government debt from hurting the economy.

The bank left its key interest rate unchanged at 1.5 percent on Thursday as uncertainty grew over the economic outlook, both due to the debt crisis in the 17-country eurozone and weaker global growth.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

FRANKFURT, Germany (AP) ' The European Central Bank left its key interest rate unchanged at 1.5 percent on Thursday as uncertainty grew over the economic outlook, both due to the debt crisis in the 17-country eurozone and weaker global growth.

The Bank of England did the same, leaving its key rate unaltered at a record low 0.5 percent as worries about Britain's slack economic performance outweighed concerns about 4.4 percent inflation.

Many economists think ECB president Jean-Claude Trichet will use his news conference later Thursday to make it clear that the bank now sees less risk of inflation increases and that interest rates will not be heading higher for some time.

Trichet will also face questions about the bank's role in fighting the eurozone's government debt crisis. The bank last week stepped up risky purchases of Italian and Spanish bonds to keep bond market turmoil from dragging down those countries' finances.

But Trichet and incoming bank president Mario Draghi, who replaces him Nov. 1, have warned governments to quickly cut deficits and said the ECB won't prop them up with bond purchases indefinitely.

Economists and investors will also be following Trichet's remarks to see if he confirms the hint he dropped during testimony in the European Parliament last week that the bank may change its stance that inflation risks are to the upside.

Many economists think Trichet will shift to a view that the risk is "balanced," meaning it's equally likely inflation could come in below expectations.

An eased assessment would suggest that the key refinancing rate will stay at 1.5 percent for some time, after increases of a quarter point in April and July based on the earlier assessment. Higher rates are used by central banks to fight inflation but can dampen growth if done at the wrong time.

Growth estimates are falling as the market turmoil from the debt crisis weighs on the broader economy. Market analysts expect the ECB to cut its growth outlook for next year to 1.4 percent from 1.7 percent and its inflation outlook to 1.6 percent from 1.7 percent.

Some economists speculate that a sharp turn for the worse in the debt crisis that affects the wider economy could even make the bank reverse course in coming months and cut rates back to the record low of 1 percent they reached during the depths of the 2007-2009 financial crisis.

Economists at the Royal Bank of Scotland see a 40 percent chance that the bank will have to slash rates by a half percent by the end of this year.

The European Central Bank has played a key role in fighting the debt crisis by buying Spanish and Italian bonds on financial markets, driving down the interest yields those countries face.

Rising market interest rates have already forced Greece, Ireland and Portugal to turn to other eurozone governments and the International Monetary Fund for bailout loans to avoid defaulting.

But Italy, the eurozone's third largest economy after Germany and France, would be too big for the eurozone's euro440 billion bailout fund to rescue. Trichet has pressed Italian Premier Silvio Berlusconi to move quickly and cut the country's deficit to reassure bond markets that the country will be able to managed its debts.

Eurozone officials are also pressing Greece to meet deficit-reduction targets to qualify for another round of bailout financing so it can keep paying its bond creditors. Greece is also in the midst of a bond swap that will cut some of its crushing debt load by exchange existing bonds for ones with longer maturities and lower interest rates.

Trichet and other eurozone officials are determined to avoid a government default, which could inflict heavy losses on European banks holding government bonds.

That could cause a recession by choking off bank credit to the economy, as happened after the collapse of U.S. investment bank Lehman Brothers in 2008.

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