European Central Bank President Jean- Claude Trichet, fronting a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign debt crisis threatens to lock money markets.
The ECB will spend 40 billion euros ($53 billion) on covered bonds starting next month and will offer banks two additional unlimited loans of 12 and 13-month durations, Trichet said at a press conference in Berlin today after policy makers left the benchmark interest rate at 1.5 percent. He also said the ECB will continue to lend banks as much money as they need in its regular refinancing operations at least until July 2012. Trichet’s eight-year terms ends on Oct. 31, when he will be succeeded by Italy’s Mario Draghi.
The ECB is resisting calls to reverse its two rate increases this year even as the debt crisis threatens to tip Europe back into recession, turning instead to tools it has previously used in an effort to calm financial markets. Trichet’s final decisions in office may be among the most critical for the future of the euro -- the currency he has championed as a symbol of European unity.
There are “intensified downside risks” to the economic outlook, Trichet said. “Ongoing tensions in financial markets and unfavorable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of this year.”
Bank of England
The Bank of England today unexpectedly expanded its bond- purchase program to 275 billion pounds ($421 billion) from 200 billion pounds after keeping its key rate at a record low of 0.5 percent.
With Greece on the brink of default and investors growing more concerned about the losses European banks may incur in the invent of a sovereign insolvency, the ECB is under pressure to increase stimulus. It has already reintroduced an unlimited six- month loan and said last month it will coordinate with the Federal Reserve to provide euro-area banks with dollars.
The ECB last offered unlimited 12-month loans at the end of 2009 as the global financial crisis made banks wary of lending to each other.
Covered Bonds
The ECB purchased 60 billion euros of covered bonds in a one-year program that expired in June last year and was aimed at freeing up banks’ balance sheets and encouraging lending during the region’s worst recession since World War II.
The 2.5 trillion-euro market for covered bonds -- assets backed by mortgages or public-sector loans -- underpins much of Europe’s real estate lending, which almost ground to a halt in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.
“The earliest the ECB would cut rates would be in December, when it has new economic projections,” Tobias Blattner, a former ECB economist now working for Daiwa International in London, said before today’s rate decision. “The ECB needs hold back some firepower and at this meeting will focus on helping the banking sector with extra liquidity.”
To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
