The European Central Bank reinstated some of its most potent crisis-fighting tools today in response to intensifying euro zone troubles, but opted to keep interest rates at 1.5 per cent despite some of the bank's policymakers calling for cuts.
At Jean-Claude Trichet's last policy meeting as ECB president, he warned the bank saw "intensified" threats to the euro zone economy from the debt crisis and slowing global economic growth.
He said it will offer struggling banks two new injections of ultra-cheap 1-year funding and buy another €40 billion of "covered bonds" - assets backed by mortgage loans or public sector lending and perceived as safe to own.
"The economic outlook remains subject to particularly high uncertainty and intensified downside risks," Mr Trichet told a news conference, offering a more gloomy prognosis than last month when he merely talked of downside risks.
That shift in rhetoric will encourage investors to believe a rate cut is not far away. Mr Trichet stoked expectations further by saying policymakers had discussed cutting rates this month, but stopped short of suggesting it was a done deal.
"There has been a discussion of the pros and cons of decreasing rates, as well as the pros and cons of maintaining rates where they are," he said, added that the bank was split over its decision to keep rates on hold.
The ECB has raised rates twice this year and may have been swayed from going into reverse immediately by inflation hitting 3.0 per cent last month, well above its target of close to but below 2 per cent.
"Inflation has remained elevated ... and is likely to stay above 2 per cent in the months ahead but to decline thereafter," Mr Trichet said, an assessment little changed from last month.
Mr Trichet gave special emphasis to the decisions the ECB had taken to reinstate ultra-supportive lending operations and its new wave of bond purchases, underscoring the separation it maintains between interest rates and crisis-fighting measures.
The bank, however, opted to remove the phrase that its interest rates remain "accommodative", a move likely to further encourage rate cut talk, although economists said the timing or likelihood were far from certain.
"It wasn't immediately obvious. There weren't any big hints that it (a rate cut) would be at the next meeting," said Barclay's Economist Julian Callow. "It would tend to imply it wants to go slow in terms of cutting rates from here."
Little fuss was made about Mr Trichet's last rate meeting. Jens Weidmann, the head of Germany's Bundesbank which hosted the Berlin meeting, one of two per year that the ECB holds outside Frankfurt, offered warm words on behalf of the governing council.
With trademark composure Mr Trichet said he remembered his first news conference eight years ago, as if it were yesterday, noting the tough periods the bank had faced during his time.
"We were never in calm waters," he told reporters. "But for more than four years now, we have been experiencing turbulent waters, storms, unexpected hurricanes."
The ECB sought to help banks withstand a further worsening of the European sovereign debt crisis and growing tension in the interbank market by renewing offers to lend them one-year funding in two operations, this month and in December. It also extended its guarantee of providing funding limit-free in its other operations until the middle of next year.
Reuters
