ECB keeps rates on hold as Trichet bows out

Oct 6, 2011, 12:01 GMT

Berlin - The European Central Bank (ECB) left interest rates on hold at 1.5 per cent Thursday as it attempts to balance out the economic risks posed by Europe's debt crisis with a pick up in inflationary pressures.

However, ECB President Jean-Claude Trichet is expected to unveil at his press conference set down for later Thursday new emergency measures to help shore up investor confidence in the 17-member eurozone in the face of the crisis that has engulfed the region.

Thursday's meeting of the ECB's rate-setting council was the last presided over by the 68-year-old Trichet. The head of the Bank of Italy, Mario Draghi, is due to take over from Trichet at the start of next month.

Most analysts had predicted that the Frankfurt-based ECB would leave borrowing costs on hold when it met Thursday at one of its regular out-of-town meetings in Berlin.

But the buildup to the meeting has been accompanied by market speculation that the eurozone debt crisis risked tipping the 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 seems to have reduced the fiercely anti-inflationary ECB's scope for delivering an early cut in the cost of money.

The increase in eurozone inflation to 3 per cent last month - its highest level in three years - 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 Draghi.

The chances that the ECB will sit tight on rates until then has increased the prospects of the bank stepping up moves to boost long-term liquidity for the banks.

This could include possibly reintroducing a 12-month Long Term Refinancing Operation (LTRO) with full allotment and relaunching its covered bond purchase programme, which are government loan-based debt.

Also overhanging the ECB's 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 have rebounded 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 was also 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 also coincided with talks late Thursday between German Chancellor Angela Merkel and Christine Lagarde and Robert 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.