ECB tipped to weigh new euro debt moves as Trichet bows out

Oct 6, 2011, 2:01 GMT

Berlin - European Central Bank Jean-Claude Trichet presides over his last meeting of the ECB's rate-setting council on Thursday amid expectations that the bank will forced to consider new emergency measures to contain the region's debt crisis.

Most analysts are predicting that the Frankfurt-based ECB will leave its benchmark refinancing rate on hold at 1.5 per cent when it meets for one of its regular out-of-town meetings in Berlin.

But the buildup to Thursday's meeting has been accompanied by analyst speculation that the eurozone debt crisis risks tipping the 17-member currency back into recession. As a result, this could force the ECB to cut borrowing costs after delivering two rate hikes this year.

However, data showing a surprise jump in eurozone inflation to 3 per cent last month - its highest level in three years - seems to have reduced the fiercely anti-inflationary ECB's scope for delivering an early cut in the cost of money.

The September increase pushed consumer prices further away from the ECB's 2-per-cent limit for annual inflation.

Either way, many analysts predict that the ECB will trim borrowing costs by 25 basis points to 1.25 per cent at its meeting in December.

This would be the second meeting presided over by the bank's new president, Italian central bank chief Mario Draghi, who takes over from the 68-year-old Trichet next month.

The chances that the ECB will sit tight on rates has increased the prospects of the bank stepping up moves to boost long-term liquidity for the banks, possibly through introducing a 12-month Long Term Refinancing Operation (LTRO) with full allotment.

Also overhanging Trichet's final meeting of the 23-head rate-setting governing council is the looming threat of a Greek default, as well as signs of the pressure the debt crisis is putting on the eurozone's banking sector.

After a turbulent few days for bank stocks, shares in Europe's financial houses rebounded Wednesday on signs that European officials were considering moves to recapitalize banks.

But as a reminder of the threat posed by the crisis, the ECB meeting is also been held as officials from the bank, the International Monetary Fund (IMF) and the European Union draw up a report on Greece's progress in slashing its high debt-and-deficit levels.

The ECB meeting will also coincide with talks between German Chancellor Angela Merkel and Christine Lagarde and Robert B. Zoellick, the heads of the IMF and World Bank respectively.

The talks to be held in the chancellor's office - across town from the ECB meeting - are expected to be dominated by the debt crisis.