ECB offers new emergency support to banks

SpringMountain

BERLIN (AP) -- The European Central Bank offered new emergency loans to banks on Thursday 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 at month's end, did not even indicate that 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 percent in coming months to stave off a rapid economic downturn. But if the ECB keeps to its habit of signaling 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.

Trichet will leave office to his successor, Mario Draghi, with his typical stance -- as a strict inflation fighter who has repeatedly touted the bank's record on keeping prices under control. Lower rates can mean a short-term boost to growth and jobs. But rates that are too low can cause inflation over the longer term and undermine the value of the currency.

Instead of cutting rates, Trichet focused on emergency credit measures to keep the financial system working properly.

Jitters in the banking sector have intensified in recent weeks and threaten to claim their first victim since the 2007-2009 financial crisis, Franco-Belgian bank Dexia. Dexia was already bailed out in the earlier phase of the crisis and now is struggling to raise funding.

To avoid a new credit crunch like the one that cut off credit to businesses and plunged the world economy into its sharpest recession since World War II, the ECB decided to flood the financial system with all the loans it needs.

The bank will offer an unlimited amount of 12-month and 13-month loans to banks. That will provide banks 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 3 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.

Trichet said the ECB would also buy up to euro40 billion ($53 billion) in covered bonds, a type of security used by banks to raise funding. 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 Thursday's decisions continued that stance.

Trichet said that the 23-member rate-setting council made its interest rate decision by consensus, not by unanimity, suggesting not everyone agreed.

The bank's caution to not boost growth contrasted with the Bank of England's decision earlier Thursday to buy another 75 billion pounds ($116 billion) in securities from banks, a step which expands the supply of money in the economy and can promote economic activity.

That makes the Bank of England the first major central bank to move to counterract the slide in global growth that has intensified since this summer.

The ECB's main role under the EU treaty is defending against inflation, which unexpectedly spiked to 3.0 percent in the eurozone in September from 2.5 percent the month before. The ECB expects inflation to fall below 2 percent by next year.

It was that role that Trichet focussed on as he reminisce briefly about his eight years in office, pointing to both the bank's record at keeping inflation close to its goal of just under 2 percent over the nearly 13 years of its existence, and at keeping money market inflation expectations in line with that.

"Have we delived price stability? Yes, we have delivered price stability," he said. "Are we credible in delivering price stability over the next 10 years? Yes. These are not words, these are deeds."

"On top of that we have to cope with the worst crisis since World War II," he said.

SpringMountain

Bank of England Expands Bond Buying Program

The Bank of England pledged to buy the most bonds since the depths of the last financial crisis as officials raced to stop the euro-region debt turmoil from pushing the economy back into recession.

The nine-member Monetary Policy Committee led by Governor Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. That’s the biggest expansion since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted an increase in asset purchases.

The pound dropped and bonds jumped after the decision, which came a day after a report showed Europe’s second-biggest economy grew less than previously estimated in the quarter through June and as Greece’s crisis strained money markets. The central bank said in a statement that slowing global growth and the turmoil in Europe “threaten the U.K. recovery.”

“I think it’s a dramatic intervention and signals the urgency of the situation,” said Brian Hilliard, chief U.K. economist at Societe Generale SA in London, who predicted a 50 billion-pound expansion. “I expect the size of the program to be increased further.”

The pound fell as much as 1.2 percent against the dollar after the decision to $1.5272. It traded at $1.5310 as of 1:48 p.m. in London. The yield on the 10-year gilt fell 5 basis points to 2.30 percent. U.K. stocks remained higher, with the FTSE 100 Index (UKX) up 2.1 percent.

‘Under Review’
The MPC’s move marks a victory for Adam Posen a year after he started voting for more bond purchases. The central bank expects the new round of stimulus will take four months to complete and it will keep the program “under review.” It will buy gilts evenly across a range of maturities at three weekly auctions with an initial size of 1.7 billion pounds.

Also today, the bank held its benchmark interest rate at a record low of 0.5 percent, as forecast by all 53 economists in a separate survey.

“The pace of global expansion has slackened, especially in the U.K’s main export markets,” the Bank of England said in a statement accompanying its decision. “Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the U.K. recovery.”

European Central Bank President Jean-Claude Trichet said today the ECB will offer banks additional longer-term liquidity and also restart covered bond purchases. Earlier today, it kept its benchmark rate unchanged at 1.5 percent.

‘Critical Role’
The Bank of England last announced an increase in its bond program in November 2009 and the purchases ended in early 2010. Chancellor of the Exchequer George Osborne said in a statement that monetary policy has a “critical role in supporting the economy” as he authorized the central bank to increase QE.

Today’s expansion shows policy makers are prioritizing the recovery over the threat from inflation, which was 4.5 percent in August, more than double the Bank of England’s target. The central bank said today that the deterioration in the outlook makes it “more likely” that inflation will undershoot its 2 percent goal in the medium term.

Minutes of today’s decision, revealing how officials voted, will be published on Oct. 19 in London. Ben Broadbent and David Miles indicated last month they were moving closer to joining Posen’s call to resume asset purchases.

Fed Steps
The U.S. Federal Reserve responded to the economic slowdown last month by adopting so-called Operation Twist, replacing $400 billion of Treasuries in its portfolio with longer-term securities in a move aimed at further reducing borrowing costs and lowering unemployment.

Two reports this week indicated the U.K. recovery retains some momentum, with gauges of services and manufacturing unexpectedly strengthening in September. Still, gross-domestic- product data showed the economy grew just 0.1 percent in the second quarter, less than previously estimated, as consumer spending plunged the most in more than two years.

Britain has struggled to recover from the recession, with the economy barely growing over the past year. The IMF cut its 2011 and 2012 U.K. growth forecasts last month to 1.1 percent and 1.6 percent from 1.5 percent and 2.3 percent, respectively.

“The downside risks to the economy have materialized from the eurozone crisis and data showing the U.K. economy hardly grew this year,” said Joost Beaumont, an economist at ABN Amro Bank in Amsterdam. “They’re showing they’re ready to act when necessary, and that their focus has clearly shifted to growth from inflation.”

Debt Crisis
U.K. Prime Minister David Cameron said on Oct. 4 that European leaders must resolve the region’s debt crisis without delay, while U.S. Treasury Secretary Timothy F. Geithner warned last month that failure to combat the turmoil could lead to “cascading default, bank runs and catastrophic risk.”

European Union officials are working on plans to boost bank capital to contain the euro-region crisis, the IMF said yesterday. Leaders of the Group of 20 nations will meet in Cannes, France, on Nov. 3-4, which international finance chiefs see as the deadline for resolving the turmoil. The Bank of England publishes new quarterly economic forecasts Nov. 16.

“This is the Bank of England’s contribution to a Plan B,” said Ed Balls, who speaks for the opposition Labour Party on Treasury matters. “While another round of quantitative easing may help, I fear it will do little to create the jobs and growth we desperately need if we are to get the deficit down.”

mengtt

spo