Thursday, October 6, 2011

ECB holds rates, new liquidity help eyed

The European Central Bank kept interest rates on hold today as broadly expected and is expected to launch a set of fresh liquidity measures to help banks to weather the euro zone's worsening debt storm.

The ECB kept rates unchanged at 1.5 percent at its meeting in Berlin, the last for ECB President Jean-Claude Trichet before he hands over to Mario Draghi, currently Italy's central bank governor.

Draghi will take charge next month and despite the fast approaching changeover, he will not be sitting along side with Trichet at the news conference, which is due to start at 1230 GMT. Bundesbank President Jens Weidmann will co-chair.

To help banks withstand a further worsening of the European sovereign debt crisis and growing tension in the interbank market, the ECB is expected to reactivate its 12-months lending operations, last used at the end of 2009, and launch a fresh programme to buy covered bond.

The ECB first bought covered bonds between 2009 and 2010 in a year-long, 60 billion euro programme.

The deepening crisis has already forced the ECB back into emergency mode. It has reintroduced six-month euro funding, a measure it had previously mothballed, and extended limit-free funding in all its operations until at least mid-January.

Over the past couple of weeks, concern about a possible default of Greece has grown and tension is building up in the money markets as banks grow increasingly weary of lending to each others.

French-Belgian municipal lender Dexia SA became the first European bank to need to be bailed out due to debt crisis problems.The European Union is moving closer to a coordinated recapitalization of banks to help restore confidence in a banking sector that is increasingly shunned by investors as a result of the euro zone debt crisis.

Recent proposals to resolve the debt crisis have included the idea of turning the European Financial Stability Facility (EFSF) into a bank that can tap the ECB for funds.

While Trichet himself on Tuesday said he opposed such measures, markets will want to know the consensus ECB view as change may be afoot with Draghi set to take over as president in November.

Market players will also keep a close eye on the ECB's assessment of the current situation and whether it still sees the monetary policy stance as "accommodative".