October 6, 2011 / 11:56 AM / 8 years ago

UPDATE 4-ECB gears up crisis measures, tussles over rates

 * ECB holds rates at 1.5 percent
 * Trichet sees "intensified" downside economic risks
 * Bank was split on rate decision after discussing cuts
 * Announces new 1-year liquidity operations to support banks
 * Restarts covered bond purchases, to spend 40 billion euros

 (Adds context, details)	
 By Paul Carrel	
 BERLIN, Oct 6 (Reuters) - The European Central Bank
reinstated some of its most potent crisis-fighting tools on
Thursday in response to intensifying euro zone troubles, but
opted to keep interest rates at 1.5 percent 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 euros 
($54 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," 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. 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 percent last month, well above its target of close to but
below 2 percent.	
 "Inflation has remained elevated ... and is likely to stay
above 2 percent in the months ahead but to decline thereafter,"
Trichet said, an assessment little changed from last month.	
 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.	
 Although the ECB uses a well-defined set of key words in its
monthly policy statements to flag rate hikes ahead, it has yet
to establish a similar vocabulary for the way down, making
Trichet's statements harder to interpret.	
 "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 SENTIMENTALITY, MORE LIQUIDITY	
 Little fuss was made about 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 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's interest rate decision was in line with the
results of a Reuters poll of economists in which 56 of the 76
economists questioned saw rates being left unchanged while 20
expected a decrease. 	
 The Bank of England, in contrast, surprised markets on
Thursday by announcing it was ready to inject 75 billion pounds
more new money into the flagging UK economy. 	
 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. (for
story click )	
 It also extended its guarantee of providing funding
limit-free in its other operations until the middle of next
year. 	
 Extra-long 12-month liquidity tenders were first introduced
in June 2009. The first such offer attracted record-breaking
demand of 442 billion euros and sent market rates plunging
drastically, easing banks' funding costs.	
 	
 CRISIS CALLS	
 The European Union executive is drafting plans for member
states to coordinate a recapitalisation of banks, as regulators
meet to check the capital buffers of stressed lenders they had
granted a clean bill of health in July. 	
 Over the past couple of weeks, concern about the risks of a 
Greek default has grown and banks have grown increasingly wary
of lending to each other. 	
 Trichet repeated calls for governments to solve the bloc's
debt crisis but continued to draw the line at other
crisis-fighting roles for the ECB, including the idea of turning
the European Financial Stability Facility (EFSF) bailout fund
into a bank that can tap the central bank for funds. 	
 "The Governing Council does not consider it would be
appropriate that the central bank would leverage the EFSF," he
said.	
 At the same time he called for euro governments to do all
they could to leverage the firepower of the aid fund "to the
maximum amount" to fight the crisis. 
($1 = 0.746 Euros)	
	
 (Additional reporting by Eva Kuehnen and Sakari Suoninen,
writing by Marc Jones)	
 
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