ECB keeps interest rate on hold

European Central Bank has left rates unchanged so far this year

LONDON, England (CNN) -- The European Central Bank left interest rates unchanged on Thursday, due to the unsteady pace of economic recovery.

The ECB, which cut its key lending rate four times in 2001, held its benchmark rate at 3.25 percent.

But economists expect the ECB to soon begin signalling interest rates could rise in the next few months if the 12-nation eurozone's economic recovery picks up steam and inflation becomes more of a concern.

Eurozone inflation -- the ECB's main barometer of monetary health -- was around 2.2 percent in April and is expected to fall below the central bank's target ceiling of 2 percent in May and June.

But the ECB could still face inflation pressure in coming months, especially in Germany where unions are striking to back demands for wage increases above a 3.3 percent average offered by employers.

An economist at Bear Stearns wrote in a note to investors that ECB president Wim Duisenberg "should be expected to beat the drum against inflation – as the longer-term inflation fundamentals are deteriorating and the ECB has a bee in its bonnet about pay pressures, not least with (Germany's) IG Metall pushing for a high pay settlement and ruffling the ECB's features."

Bank of England cut rates 7 times last year in an effort to bolster the economy

He added: "The ECB will hike rates ahead of the Fed (U.S. Federal Reserve), and perhaps as early as July, compared with a likely Fed move in September. The ECB is far more comfortable about recovery prospects than the Fed, but is more concerned about underlying inflation risks than the Fed right now."

"The ECB looks likely to join the ranks of Canada, New Zealand and Sweden, whose central banks have already pulled the trigger for higher rates."

The Bank of England is expected to keep rates on hold when its Monetary Policy Committee meets next week. The BoE held its benchmark rate at four percent -- its lowest level in 37 years -- after reducing it seven times last year.

The UK is also facing inflation pressure, which could prompt the BoE to hike rates in the near future in order to stop the economy from overheating. Consumer spending and house prices have risen in recent months, and the manufacturing and services sectors have been showing signs of strong growth.

But despite signs of economic recovery in Europe and the United States, central banks have been hesitant to begin raising rates for fear of stalling a recovery.