ECB offers loans to banks but stops short of interest rate cut
The European Central Bank offered new emergency loans to banks yesterday to help them through the turmoil of the continent's government debt crisis - but decided against an interest rate cut despite mounting fears of another recession.
Bank president Jean-Claude Trichet, holding his last news conference before retiring, did not even indicate a rate cut was possible at the next month's meeting.
Many economists have predicted the bank will have to cut its key refinancing rate from 1.5% in coming months to stave off a rapid economic downturn. But if the ECB keeps to its habit of signalling moves at least a month ahead of time, that would mean no cut before December at the earliest.
"The economic outlook remains subject to particularly high uncertainty and intensified downside risks," Trichet said, adding however that "at the same time interest rates remain low".
He noted that inflation, the ECB's main focus as the monetary authority for the 17-nation euro, will likely remain well above target for months.
The ECB will offer an unlimited amount of 12-month and 13-month loans to banks. That will provide them with financing for a longer period - into 2013 in the case of the 13-month offering - and shield them from turbulence in borrowing markets.
The ECB will also keep offering unlimited amounts of credit at its shorter-term lending operations of up to three months through the first half of next year.
Many European banks are exposed to losses on Greek debt. That has made borrowing between banks - crucial for their daily functioning - increasingly difficult because of fears the money might not be repaid.
The ECB's presence will help free up that credit market and make borrowing easier for banks.
The bank has maintained throughout the crisis that its unconventional measures such as extra credits are kept in a separate track from interest rate policy, and yesterday's decisions continued that stance.