ECB leaves key rate unchanged

FRANKFURT, Germany The European Central Bank has left its key interest rate unchanged at a record low 0.5 percent, holding off on more stimulus as it waits for a recovery in the 17 European Union countries that use the euro.

Draghi's news conference later Thursday will be scrutinized for clues on whether the bank is any closer to cutting rates or to deploying other measures it says it is studying.

Most economists expected the bank to leave rates unchanged. Lower rates can promote economic growth by reducing the cost of the credit businesses need when they borrow to expand their businesses. Draghi has said the bank is ready to act if needed, indicating it could cut interest rates further if the recovery does not arrive on time.

Draghi has been stressing that the ECB remains far from signaling any withdrawal of existing measures -- unlike the U.S. Federal Reserve, which has signaled it could phase out its bond-buying program next year if the stronger U.S. economy keeps growing.

The Fed's program -- known as quantitative easing -- and its low interest rates had been sending money flowing into stocks and bonds for months. So when the Fed Chairman Ben Bernanke signaled its potential reversal, prices fell across many markets. In particular, indebted eurozone countries Spain and Italy briefly faced higher borrowing costs rise as the prices of their bonds dipped.

Thursday's rate decision came at a meeting of the bank's 23-member rate-setting council at its headquarters in Frankfurt, Germany. The ECB is the issuer of the euro currency and the chief monetary authority for the eurozone -- the world's second-largest economy after the U.S. -- and its 331 million people.

The bank is a key player in combatting Europe's 3 1/2 year struggle with too much government debt and lagging economic growth. The eurozone economy remains stuck in recession, shrinking 0.2 percent in the first quarter for the sixth straight decline in a row. Unemployment is at 12.2 percent.

Four countries -- Greece, Portugal, Ireland and Cyprus -- have needed bailout loans in order to keep servicing their debts. Italy and Spain have also had trouble with excessive debt levels. Efforts to reduce debt by cutting government spending have contributed to recessions and higher unemployment in member countries.

So far, the ECB has tried to boost the eurozone's economy by cutting the refinancing rate it charges private-sector banks to a record low, and by giving unlimited cheap loans to banks for three years. It also offered to intervene in bond markets and buy the debt of financially troubled countries that promise to reform their finances. The mere offer, so far not carried out, has supported bond prices and lowered interest yields. This has taken the pressure off the government finances of Spain and Italy and eased the atmosphere of crisis that held sway over Europe last year.

But the low interest rates and cheap loans have not pulled the eurozone out of its recession. The rates at which the ECB lends to banks are still not being uniformly passed onto businesses because some banks have strained finances.

Here are things the ECB could do in coming months:

-- Another cut in the benchmark rate, to 0.25 percent, to lower borrowing costs for businesses and consumers. It could also cut the cost of ECB loans to banks and help their finances a little bit.

-- Give explicit reassurance that low rates will stay until growth or unemployment reach numerical targets. This kind of confidence-building, called "forward guidance," has been used by the Fed. So far the ECB has simply said rates are low for as long as necessary.

-- Another offer of cheap, long-term loans to banks. That would make sure they have the money to lend when the economy starts to pick up and businesses start asking for it. Some think another round of loans could be for as long as five years.

-- Work with other EU institutions to encourage banks to bundle more loans to small businesses and sell them off as bonds. That could encourage lending. The ECB can't do this alone, however, and it could take months to set up.