MercoPress. South Atlantic News Agency

European Central Bank implements “liquidity infusion”

Trichet was cautious about the Euro zone economy prospects

The European Central Bank's, ECB, kept its key rate unchanged at 1% for another month following their regular meeting. But at a news conference on Thursday ECB president Jean-Claude Trichet said he was pleased with the first results of the “liquidity infusion” to the banking system.

“We were happy with the result of this liquidity supply. It is of course emblematic of what we've been doing in enhanced credit support” said Trichet of the ECB record 442 billion Euro in 12-month credits to banks last week. It is expected this infusion will help loosen lending to consumers and businesses in the Euro zone's struggling economy.

Trichet added the move should further strengthen banks' access to cash and, help normalize money markets and extend more credit. Yet he also urged banks to do their part by passing the money onward to business and consumers.

“We trust what we have been doing in the non-conventional measures we have taken and which have been very spectacular” he told reporters. “It also justifies our call to commercial banks in general to be up to their responsibilities — mainly to ship to the real economy the extraordinary measures we have been doing.”

“The current rates remain appropriate taking into account all the information and analysis that has become available” since it met last month, he said, adding that the “fall of annual inflation rates into negative territory in June is in line with previous expectations and reflects temporary effects.”

Downplaying the risk of deflation he added that Euro zone inflation is expected to remain in positive territory in the medium and long term, while price and cost developments are expected to remain dampened in wake of the ongoing sluggish demand in the Euro zone and elsewhere.

“Indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the governing council's aim of keeping inflation rates below, but close to, 2% over the medium term” he said.

ECB also unveiled details of its previously announced Euro 60 billion covered bond purchase program which it hopes will also support more lending between banks. Covered bonds are a relatively safe type of asset-backed security.

Trichet said bonds on the primary and secondary market — both new issues and previously owned — could be purchased but they will have be denominated in Euros, having a minimum double-A rating and minimum issue size of Euro 500 million. The decision on the bond purchase program will last through June 30, 2010.

On the state of the Euro zone economy, Trichet said recent economic data indicated growth could remain weak for the rest of this year, but should decline less strongly than in the first quarter of 2009. He said after a phase of stabilization, a gradual recovery with positive quarterly growth rates is expected by mid 2010; however the Euro Zone economy remains in “uncharted waters”.

ECB last cut rates in May, when they were reduced to 1% from 1.25%. It has reduced rates seven times since last October, when rates stood at 4.25%. In the latest meeting, the 22-member council also left its other two interest rates - the marginal lending rate and the deposit rate - unchanged at 1.75% and 0.25% respectively.

In related news Sweden, which is outside the Euro zone, halved its key interest rate to 0.25%, which is the lowest since records began in 1907. Sweden's Riksbank predicted that rates would remain at the new level until late next year.

It also offered 100 billion Swedish kronor (13 billion US dollars) of loans to banks as part of attempts to lift the economy out of recession.

Iceland's central bank kept its interest rate on hold at 12%. The decision comes a month after defying warnings of the International Monetary Fund and cut its rate from 13%.