BEIJING, Feb. 8 (Xinhua) -- Pressure remains on the European Central Bank (ECB) to cut interest rates in the first half of this year as the negative effects of financial market instability feed through, despite the bank's decision to keep its key rates unchanged, analysts said.

    The ECB decided on Thursday to hold its key interest rates steady at 4 percent, ignoring calls from European economic circles to follow the U.S. Federal Reserve's lead to lower rates to promote economic growth.

    However, volatile financial markets will further affect the real economy in Europe, leaving the possibility open for a cut in the ECB's benchmark interest rate in the first half of the year, analysts said.

    The main pressure, which builds on the ECB to cut rates, includes the Bush administration's tax-relief plan and the U.S. Fed's monetary policy of lowering interest rates in recent months, as the U.S. central bank has reduced rates five times since September to the current 3 percent in a bid to stimulate the economy.

    Other factors which have helped turn up the heat on the ECB include forecasts by the International Monetary Fund that European economic growth would slow down to 1.6 percent in 2008, down from an estimated growth rate of 2.6 percent in 2007.

    In addition, the Bank of England on Thursday lowered its benchmark rate by a quarter percentage point to 5.25 percent, its second cut in three months.

    However, knowing that the euro zone is not immune to any global slowdown, the ECB seems more concerned about prices and high inflation, fearing that a cut in rates to boost growth could also spur inflation as consumer demand rises, the analysts said.

    "This decision reflects our assessment that risks to price stability over the medium term are on the upside, in a context of very vigorous money and credit growth," ECB President Jean-Claude Trichet told a news conference after the rate decision.

    Analysts said the ECB left its interest rates unchanged for a number of reasons.

    First of all, the ECB's primary concern remains to curb inflation in the euro zone which jumped to 3.2 percent in January due to soaring prices of energy and food, its highest level since the euro was adopted and far above the ECB's comfort level of around 2 percent, according to the European Union's statistics bureau Eurostat.

    The rising inflation has made it hard for the ECB to do what the U.S. Fed has done to spur the economy.

    The decision made by the 21-member governing council of the ECB signaled that the overriding concern of the bank is curbing inflation rather than supporting a weakening economy, economists said.

    Another reason deals with the brisk economic activity in the euro zone. The latest economic data show that production, consumption and employment in the euro zone remained in a relatively sound state in January. Leaders of some of Europe's biggest economies -- Germany, Britain, France and Italy -- were also keen to stress that the fundamentals of the European economy were still strong.

    Statistics released by the European Commission in January showed that the economic sentiment indicator and business climate index are still above its long-term average in the euro zone, although the economic sentiment has been on a downward path since mid-2007. This shows the level of activity in the euro zone in January was still quite brisk.

    In addition, Eurostat said the euro zone unemployment stood at 7.2 percent in December, the lowest level since the indicator was introduced in 1993 and much lower than 7.9 percent registered a year earlier.

    Analysts said lower unemployment is a strong stimulus for personal consumption, which helps to prop up economic growth.

    According to the ECB, although an economic slowdown in the euro zone is piling pressure on the central bank to cut its interest rates, economic growth in the euro zone is unlikely to suffer a big decline, as what happened in the United States.

    The U.S. subprime mortgage crisis is also a major factor behind the ECB's thinking. As a result of the crisis, some European banks are running in the red and the European stock markets have become wildly volatile.

    For instance, the Swiss Bank, Europe's largest bank in terms of assets, posted a record net loss of 12.5 billion Swiss francs (11.4 billion U.S. dollars) for the fourth quarter of 2007. The Barclays Bank, the Deutsche Bank and the HSBC also suffered huge losses.

    Economists said the ECB's refusal to cut rates will enable it to provide funding to financial institutions, which will in turn help ease the crisis in the financial markets.

    But for all its latest rate decision, the ECB acknowledged that risks and uncertainties affecting economic growth were still on the rise.

    Instability factors in the financial market, the gloomy prospects of the world and U.S. economies, soaring oil prices and concerns about protectionist pressures all pose a challenge to efforts to boost European economic growth.

    The ECB said it will continue to monitor very closely all developments over the coming weeks.

    Meanwhile, the ECB called on the euro zone countries to step up their structural reforms to help economies to adjust to adverse shocks, foster productivity growth and increase employment and competition, thereby also helping to reduce inflationary pressures.