ECB leaves rates on hold but moves to bolster banks

Oct 6, 2011, 15:34 GMT

By Andrew McCathie, dpa =

Berlin (dpa) - The European Central Bank (ECB) left interest rates on hold Thursday but launched a series of new emergency measures to counter the growing threat posed to Europe's economy and banking sector by the region's long-running debt crisis.

Announcing the moves to boost liquidity for banks in the 17-member eurozone, ECB chief Jean-Claude Trichet indicated that the bank was in no rush to trim interest rates after it kept borrowing costs on hold at 1.5 per cent.

Speaking at what his final monthly press briefing, Trichet warned that 'the economic outlook remains subject to particularly high uncertainty and intensified downward risks.' But he also insisted that 'interest rates are low.'

Instead of cutting rates as some analysts had forecast, the ECB moved to reactivate steps it launched at the height of the world financial crisis in 2008.

This includes reintroducing covered-bond purchases and year-long loans for banks amid concerns that the debt crisis could result in money markets freezing up again.

The ECB's moves followed an announcement by the Bank of England in London that it was expanding its bond-purchase program to 275 billion pounds (420 billion dollars) and keeping borrowing costs at a record low of 0.5 per cent.

The ECB's meeting in Berlin was held against the backdrop of signs of a worsening economic outlook for the eurozone, raising fears that the debt crisis could tip the currency bloc back into recession. The Frankfurt-based bank regularly holds out-of-town meetings.

Thursday's meeting of the ECB's 23-strong 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.

With inflation climbing to its highest level in three years of 3 per cent in in September, most analysts are now expecting the ECB to trim the cost of money by 25 basis points at its December meeting.

The ECB will also have a new set of economic growth and inflation forecasts in December.

Looking back over his eight years as ECB head, Trichet said: 'We were never in calm waters.'

'But,' he went on to say, 'for more than four years now, we have been experiencing turbulent waters, storms, unexpected hurricanes.'

The so-called non-standard measures planned by the bank will extend liquidity for the banks to at least the middle of 2012.

It also includes moves to boost liquidity for the banks through two 12-month Long Term Refinancing Operations (LTRO) with full allotment.

Outlining the plans, Trichet said that the eurozone's that the banking sector requires particular attention, adding that the banks need to take steps to reinforce their balance sheets.

While one LTRO has a maturity of 12 months in October, the other has a 13-month maturity in December.

The ECB is also launch a 40-billion-euro (53.1 billion dollars) covered bond purchase programme, which are collateral backed corporate issued by banks.

At its meeting, the ECB also decided to continue conducting its main refinancing operations as fixed rate tender procedures with full allotment for as long as necessary. This would at least until July 2012.

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.