Europe's central banks stand firm on rates

The ECB, headed by Mario Draghi, kept rates unchanged at its meeting Thursday

LONDON (CNNMoney)

The European Central Bank left its key interest rate at 0.75%, and the Bank of England held its at 0.5%.

The eurozone economy is set to contract for a second year running in 2013, as recession grips southern Europe while much of the rest of the region is in stagnation. But Europe's biggest economy, Germany, saw a sharp rebound in industrial orders in December, and the purchasing managers' index for the eurozone rose for a third straight month in January.

Another sign of a return to more normal financial conditions came last week, when eurozone banks repaid €137 billion in emergency 3-year loans issued by the ECB a year ago in the middle of the credit crisis.

Related: 'Jury still out' on eurozone - Draghi

The shrinking of the ECB's balance sheet and refusal to relax policy further to help lift the eurozone economy out of recession has helped drive the euro to 14-month highs against the dollar.

The strong euro has prompted some European politicians to call for an exchange rate policy. France has promised to raise its concerns at a meeting of G-20 nations later this month.

The Bank of England also resisted pressure to extend its government bond-buying program, leaving the volume at £375 billion. The U.K. economy contracted by 0.3% in the fourth quarter of 2012, leaving it teetering on the brink of a third recession in five years.

"The [bank] continues to judge that the U.K. economy is set for a slow but sustained recovery," it said in a statement. " But the risks are weighted to the downside, not least because of the challenges facing the euro area."

Related: Europe: No retreat from austerity

U.K. manufacturing output bounced back in December -- rising 1.6% after a decline of 0.3% in November - reducing the risk of a second consecutive negative quarter for gross domestic product.

Still, given the government's determination to cut the budget deficit, some analysts say the bank may need to pump more cash into the economy.

"Overall, in the current economic situation, further expansion of the asset purchase program would be warranted if the economy stays weak," the OECD said this week.

The weaker economy is already throwing the government's fiscal plans off course. The Institute for Fiscal Studies said Wednesday the U.K. would borrow £64 billion more than planned in 2014-2015 unless further spending cuts or tax rises were implemented.

First Published: February 7, 2013: 7:59 AM ET

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