Frankfurt: The European Central Bank (ECB) kept interest rates at a record low as the sovereign debt crisis widens economic divergences within the Eurozone, straining the bank's one-size-fits all monetary policy.

The ECB's Governing Council set the benchmark rate at 1 per cent for the 21st month, as predicted by all 53 economists in a Bloomberg News survey. President Jean-Claude Trichet was to hold a press conference later in Frankfurt. The Bank of England kept its key rate at 0.5 per cent yesterday.

"The ECB has to do its part to contain the panic on financial markets and provide generous liquidity as long as banking problems persist," said Holger Schmieding, chief economist at Joh Berenberg Gossler and Co in London."

At the same time, interest rates of 1 per cent aren't needed any longer in a vast part of the euro region and should be normalised if growth continues."

Eurozone economies are diverging as the debt crisis damps growth in peripheral countries such as Greece, Ireland and Portugal while northern European nations such as Germany power ahead. That's making it harder for the ECB to determine when to exit from its emergency measures and when to tighten policy.

Economists forecast the ECB will raise rates in the fourth quarter of this year, a Bloomberg survey shows. Inflation quickened to 2.2 per cent last month, breaching the ECB's 2 per cent limit.

‘Year of reckoning'

Trichet's final year at the helm of the ECB may be his toughest yet. With bond yields in debt-strapped nations near euro-era highs, he must decide when to stop buying government assets, withdraw unlimited liquidity provision for banks and possibly even raise rates to stem inflation risks. His response to those challenges may shape his legacy by helping to determine the euro's future.

"2011 is a year of reckoning for Trichet and the ECB," Schmieding said.

The single currency dropped 7 per cent against the dollar last year on mounting investor concern about governments' ability to cut excessive budget deficits. It rose to $1.3192 after yesterday's ECB rate decision from $1.3175 before.

Portugal, with a budget shortfall of more than twice the European Union's limit, may join Greece and Ireland in receiving EU aid as part of a package of new measures being discussed by governments to quell the crisis, according to four people with direct knowledge of the talks.

Trichet has warned governments not to rely on the ECB to solve the debt crisis and urged them to take greater responsibility for fiscal imbalances.

Britain will not join euro

Britain will not be drawn into new mechanisms to help protect the euro, Prime Minister David Cameron said yesterday, as European ministers try to thrash out ways to shore up support for the common currency project.

Speculation has mounted that Spain and Portugal may join Ireland and Greece in having to be bailed out by international lenders due to concern over their debt programmes, chipping away at the viability of the common currency.

"We want a strong Eurozone, we want it to sort out its problems, we won't stand in its way, but we are neither joining the euro nor are we going to be drawn into fresh and new mechanisms within the euro," Cameron said.