European Central Bank keeps rates at 4%

The European Central Bank on Thursday held its key interest rate at 4% and officials used a surprise press conference to signal a rate hike next month. The decision to keep rates at 4% for the second straight month was expected by economists.

Jean-Claude Trichet, the ECB"s president, told journalists in Frankfurt that the bank will adopt a posture of "strong vigilance" -- meaning it"s highly likely that the central bank will move to raise interest rates in September. Financial markets had been mostly expecting a hike in September, though some economists thought October might be more likely. Rate hikes have followed each time that the central bank has used the "strong vigilance" description in discussing how it"s viewing developments.

But Trichet also said that he"d say in September whether policy is accommodative or not -- perhaps an indication that, after taking rates to 4.25%, the central bank will no longer think its interest policy is loose. He also said that current market re-pricing was a process of normalization but didn"t want to see a sharp market correction.

The central bank is concerned by strong money-supply growth, of more than 10%, at a time when the European economy is growing solidly. Still, with the euro"s recent strength against the U.S. dollar and Japanese yen, and manufacturing sentiment surveys that have eased somewhat, the ECB is wary of hiking rates too aggressively. The ECB has gradually lifted interest rates from 2% in December 2005 to 4%, reached in June