ECB holds rates, odds of speedy cut seen lower

FRANKFURT (Reuters) - The European Central Bank said it left interest rates unchanged at 4 percent on Thursday to help the fight against inflation, though it unveiled higher consumer price forecasts for this year and next.

ECB staff also cut forecasts for euro zone growth but the bank's firm focus on price risks prompted analysts to push back expectations for a speedy cut to interest rates and sent the euro to a new record high against the U.S. dollar.

ECB President Jean-Claude Trichet promised the central bank would do everything necessary to keep inflation in check, although he also said economic uncertainty was unusually high.

"We had absolutely no call for either decreasing rates or increasing rates, we were unanimous," Trichet told a news conference after holding rates for the ninth month in a row.

"We believe that the current monetary policy steps will ... achieve our objective of medium term price stability and solid anchoring of inflation expectations."

Analysts said Trichet's comments raised the odds of an extended pause at the current level as the ECB faces competing pressures from slowing growth and record high inflation.

"Mr. Trichet does not sound like a central banker who may be about to cut interest rates," CIBC World Markets economist Audrey Childe-Freeman said. "The policy of wait and see is here to stay for a while longer."

Before the rate decision investors had bet on rates sinking to 3.25 percent by year-end, but Trichet distanced himself from these expectations.

"We're not underwriting the present future market interest rates," he said, when asked if expectations were misplaced.

Anchoring inflation expectations in the medium to longer term was the ECB's top priority, he said, denying that the ECB was favoring the interests of banks struggling with market turmoil over those of pensioners and ordinary citizens.

"We will do what is necessary to deliver price stability in the medium term. Full stop. And you can deduce whatever conclusion you judge appropriate from that," he said.

INFLATION OUTLOOK WORSE

But at the same time, Trichet unveiled staff inflation forecasts sharply higher than the last round of projections in December, which suggest the ECB could miss its goal of inflation below 2 percent for 10 years running.

Staff now see inflation around 2.9 percent this year and 2.1 percent in 2009, compared to the last forecasts in December of around 2.5 percent this year and 1.8 percent in 2009. Since then, inflation hast shot up to a record 3.2 percent and Trichet said it was likely to stay elevated for some time.

The forecasts were higher than many economists had expected and will make it harder to justify rate cuts, although unions again urged the ECB to follow other major central banks and loosen policy to ease pressure on the euro.

"The euro's continuing appreciation is becoming alarming," the European Trade Union Confederation said in comments echoed by employer groups.

The International Monetary Fund also said the euro was "on the strong side" although IMF deputy John Lipsky said ECB rates were appropriate.

On the record strength of the euro, which crimps growth while also dampening inflation, Trichet said he noted with "extreme attention" the United States' support for a strong dollar.

But he failed to warn against "brutal" currency moves and instead stuck close to the script Group of Seven industrialized nations, disappointing some expectations for verbal intervention and helping to push the euro to a peak of $1.5372.

Economists as well as traders backtracked on expectations for rate cuts, according to a Reuters poll conducted after the news conference. None of the 64 economists surveyed after the decision saw a cut next month, compared with 9 of 64 who predicted an April cut in a poll taken last week.

Some are less sure the bank will move at all this year, although most remain convinced the ECB will be forced to cut to 3.75 percent by the end of June, with another cut to come by September, leaving rates at 3.5 percent by year-end.

The ECB staff forecast growth will slow to around 1.7 percent in 2008 before picking up to 1.8 percent in 2009. Three months ago, the ECB staff projected growth of about 2.0 percent this year and 2.1 percent in 2009.

Most private-sector economists expect growth of around 1.6 percent this year, as the slowdown in U.S. growth increasingly weighs on the euro zone economy.

"Uncertainty about the prospects for economic growth remains unusually high. The downside risks to the outlook for economic activity continue to exist," Trichet said.

Trichet stressed that -- as ever -- the Governing Council did not formally endorse its staff's economic projections and that he did not back the market rate outlook that formed a technical assumption of the forecasts.

(Writing by Krista Hughes and David Milliken; editing by Ian Jones))