FRANKFURT, Aug 7: The ECB recognised on Thursday that eurozone economic activity was weakening, but president Jean-Claude Trichet focused on inflation and signalled that the bank’s main lending rate would stay on hold.

The European Central Bank held its key interest rate at 4.25 per cent amid growing signs of a European economic slump combined with rising inflation.

Analysts said comments by Trichet to reporters following the decision were a clear sign the eurozone refinancing rate would remain on hold for the rest of the year.

“The bank is likely to keep the refi rate at 4.25 per cent well into 2009,” Commerzbank chief economist Joerg Kraemer predicted.

Foreign exchange markets reacted violently after Trichet acknowledged that economic growth was beginning to slow.

The ECB had identified such risks to economic growth, Trichet said, adding that “we consider that there is some materialisation of the risks that we have identified.

“But they were identified so it is not a surprise,” he said.

In its statement, the ECB acknowledged that “growth figures for mid-2008 will be substantially weaker than for the first quarter of the year,” but urged markets to “look through the volatility in quarter-on-quarter growth figures and monthly indicators.”

Recent eurozone indicators have pointed to a sharp slowdown and sparked speculation the 15-nation economy could be headed into a recession.

Trichet repeated a favourite comment that the ECB had “one needle in our compass” which points it towards keeping prices stable, underlining his focus on inflation that hit a record 4.1 per cent over 12 months in July.

“The ECB continues to face a real inflation problem,” Kraemer said, because long-term inflation expectations were still considerably higher than the bank’s target of 2.0 per cent. Trichet also reiterated a comment made last month reflecting the bank’s neutral position that analysts say meant it would not be changing interest rates anytime soon.

“I stick to what I said, we have no bias,” Trichet said.

Bank of America analyst Gilles Moec said that the use of the phrase on Thursday indicated that “the ECB would stay where it is for quite a while.”

Meanwhile, Trichet warned of “very strong concern that price and wage-setting behaviour could add to inflationary pressures via broadly based second-round effects,” a reference to the danger of wage increases causing an inflationary spiral.

On growth, Trichet said uncertainty over the outlook for economic activity remained high amid “very high and volatile levels of commodity prices and the ongoing tensions in financial markets.”

The ECB governing council, which does not normally meet in August, weighed record inflation against signs the 15-nation economy is weakening rapidly and might even be falling into recession.—AFP