Volkswacht Bodensee - ECB holds interest rates as strong euro causes jitters

As expected, the central bank for the 21-nation single-currency area kept its benchmark rate on hold at two percent, where it has been since June last year.

A marked strengthening of the euro last week, followed by news that eurozone inflation eased to 1.7 percent in January -- below the ECB's two-percent target -- have fuelled debate about whether policymakers might start considering rate cuts.

But in a statement announcing the rate decision, the ECB said "inflation should stabilise" around its target in the medium term.

"The economy remains resilient in a challenging global environment," it said.

"Low unemployment, solid private-sector balance sheets, the gradual rollout of public spending on defence and infrastructure and the supportive effects of the past interest rate cuts are underpinning growth," it added.

Still, it warned that "the outlook is still uncertain, owing particularly to ongoing global trade policy uncertainty and geopolitical tensions".

US President Donald Trump's volatile trade policies in particular have unnerved Europe.

There was another flare-up last month when Trump threatened to hit eight European countries with new tariffs over their opposition to his desire to annex Greenland, but he later climbed down.

The ECB also used its typical language that rate decisions would be based on "a data-dependent and meeting-by-meeting approach".

"The Governing Council is not pre-committing to a particular rate path," it said.

The Bank of England also left its benchmark interest rate unchanged Thursday, at 3.75 percent, while cutting its forecasts for UK growth this year and next.

- Strong euro jitters -

A stronger currency makes imports cheaper, which could drive inflation down even further -- potentially leading consumers to delay purchases, with negative ripple effects across the economy.

But a strong euro can also weigh on the eurozone's crucial exporters, particularly Germany, as it makes the cost of companies' goods pricier overseas.

It could thus hit the eurozone economy at a time growth is starting to get back on track, potentially undermining efforts to close the gap with China and the United States.

All eyes will now be on ECB President Christine Lagarde's press conference after the rate decision, though she typically declines to comment on the future direction of monetary policy.

At recent meetings, she has emphasised that the central bank is in a "good place", though analysts say the recent currency moves mean this good place is looking somewhat less comfortable.

The euro has been gaining ground for some time, in particular due to worries about Trump's volatile policies, from levelling tariffs against trading partners to threatening to seize Greenland.

But it extended gains sharply last week as investors sold off the dollar, which briefly hit a four-and-a-half-year high above $1.20. It has since eased, and was at $1.18 both immediately before and after the ECB's rate call.

The ECB does not target any particular exchange rate, but its officials do monitor currency movements as they could impact inflation.

A stronger euro is not all bad news, as it boosts household spending power at home and on holidays overseas.

The rise of the single currency also points to the growing appeal of Europe at a time of investor worries about the United States and Trump's unorthodox stewardship of the world's top economy.

J.Sauter--VB