LONDON The European Central Bank broke the longest streak of interest rate rises in its 25-year history on Thursday, as slowing inflation continued to point to an eventual drop towards its 2% target and the bloc's economy deteriorates.

The bank left its main policy rate at 4% and said current borrowing costs may be just enough to tame inflation if they stay at current levels for "sufficiently long".

The ECB did not make a change to its balance-sheet run off process, pledging to continue reinvesting bonds under its 1.7 trillion-euro Pandemic Emergency Purchase Programme until the end of next year.

The euro offered little reaction to the initial decision, trading 0.2% lower against the dollar, while euro zone bank shares were in the red, but above session lows.

MARKET REACTION:

FOREX: The euro initially dropped against the U.S. dollar before paring some of that decline to last trade down 0.2% at $1.0544.

BONDS: Euro zone bond yields dropped and the closely watched spread between Italian and German 10-year bond yields briefly fell below 200 basis points.

STOCKS: European stocks recouped some of their losses, with the STOX 600 index last down 0.7% and banks down 1.1%

COMMENTS:

RICHARD GARLAND, CHIEF INVESTMENT STRATEGIST, OMNIS INVESTMENTS:

"The ECB has officially joined the Pause Party of central bankers in wait-and-watch mode. This makes sense - inflation is falling quite sharply and they had signalled last month that the direction of travel for rates will be sideways. 'Higher for longer' is also be a mantra the ECB will be keen to repeat for a while, ensuring their work to date won’t be undone by markets anticipating rate cuts too soon."

DEREK HALPENNY, HEAD OF RESEARCH GLOBAL MARKETS EMEA, MUFG, LONDON:

"No big surprises, they are emphasizing that the impact of monetary policy is very clear – the word 'forceful' was used. No change in the description of inflation, which means we should get a relatively balanced press conference."

"The PEPP guidance is unchanged, we certainly didn’t expect a formal change, and so it’s more about whether there’s a discussion about the balance sheet, and we’ll only know that when someone asks the question in the Q&A."

DEAN TURNER, CHIEF EUROZONE AND UK ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON:

"The decision by the ECB to keep rates on hold was well flagged, and therefore came as no surprise to investors. Although the messaging in the press release remained largely unchanged, with an ongoing emphasis on data dependency, and the need to ensure that inflation returns to target, it seems clear that the rate hiking cycle is over."

(Reporting the Markets Team; Compiled by Yoruk Bahceli; Editing by Amanda Cooper)