The European Central Bank has kept its key interest rate on hold at 4.25%, resisting pressure for a rate cut.

Eurozone inflation fell to 3.6% in September, but it is still well above the 2% target.

ECB president Jean-Claude Trichet said that a quarter-point interest rate cut had been considered, but there had been a unanimous vote against it.

He added that the risk to economic growth had increased and that economic activity was weakening.

Mr Trichet said that the effects of the banking crisis had yet to feed through into economic data.

But he also said it was important for the ECB to keep inflationary expectations down.

“With the weakening of demand, upside risks to price stability have diminished somewhat but they have not disappeared,” he said.

Recession

Last week, Ireland became the eurozone’s first economy to be formally in recession.

There is concern that the problems facing Europe’s banks could send other economies into recession.

“In the past four days, the governments of no less than seven European countries were required to nationalise banks or guarantee the deposits of large cross-border institutions,” US economics professor Nouriel Roubini said on Wednesday.

The ECB has been lending billions of euros to its struggling banks in an attempt to ease the credit crisis.

News reported by The BBC

The 15 economies of the eurozone contracted by 0.2% between April and June, heightening fears that the euro area is sliding towards recession.

The eurozone’s first decline since it was created in 1999 was driven by a slowdown in exports and consumer spending.

The German economy, Europe’s largest, shrank by 0.5% in the second quarter compared with the previous quarter.

And in both France and Italy GDP shrank by 0.3% in the second quarter.

The slowdown was less pronounced in the wider European community of 27 nations including the UK, which contracted by 0.1%.

“The possibility that the European Central Bank is cutting interest rates in 2008 to support the sickening economy is remote” Economist Jörg Radeke

However Estonia, where the economy contracted for the second consecutive quarter, is now considered to be in recession.

Ireland, whose economy contracted in the first quarter of the year, has not yet released its second quarter growth figures.

Compared to the second quarter of 2007, the eurozone economies grew by 1.5% and the 27 European Union countries grew by 1.7%.

The news weakened the euro, which was already well down from its recent highs against the dollar.

But high eurozone inflation, which was unchanged on the month, made it unlikely that the European Central Bank, which raised interest rates last month, will reverse its stance.

‘Deterioration’

The figures reflect the way in which exporters have been affected by the strength of the euro, which makes their products more expensive overseas, and a more general slowdown in global demand.

French finance minister Christine Lagarde, said the decline in the French economy in the second quarter “mostly reflects the deterioration of our international context, which particularly weighed on our exports and which is common to all European countries”.

“The fundamentals of the French economy are healthy,” she added.

Meanwhile a German finance minister said its economy could contract again in the next quarter which would mean Germany was officially in recession.

“At the moment that cannot be ruled out,” said deputy economy minister Walther Otremba.

‘Orders down’

Germany was once seen as the main driver of growth in the eurozone.

Send us your commentsHowever exporting companies, such as Berlin-based manufacturer Witels Albert, are cutting back after seeing orders decline in the last few months, especially from the US.

“There is a slowdown in the industry and one of the main reason is the rise in oil price,” chief executive Horst Schneidersreit, told BBC News.

“We have seen this in our own company. Our orders have slowed down.”

Despite the sharp slowdown in the second quarter in Germany, the government said it still expected GDP growth of 1.7% this year.

Spain was the only one of the major eurozone economies to see its economy expand between April and June. It grew by 0.1% compared with the previous quarter.

Inflation steady

Figures also released on Thursday showed that prices across the euro area rose by 4% in July compared to a year earlier.

The European Central Bank increased interest rates in July by 025% to 4.25% in a bid to combat rising prices.

The July figure is the same as June’s inflation rate, but although the rate of increase is not quickening, economists said rising prices were still a concern.

“Although inflation has been stable at 4.0 % in July, it is still way above target,” said Jörg Radeke from the Centre for Economics and Business Research.

“Hence, the possibility that the European Central Bank is cutting interest rates in 2008 to support the sickening economy is remote.”

News reported by The BBC