ECB keeps key interest rate unchanged, offers short-term loans to help markets

ECB keeps rates low, offers extra liquidity

FRANKFURT, Germany — The European Central Bank on Thursday broadened its efforts to ease market tensions and minimize damage from the debt crisis by offering short-term loans to banks on top of existing efforts to boost government debt and keep interest rates at record lows.

President Jean-Claude Trichet said unlimited 3-month loans would be offered to banks over the coming months and said the program to buy bonds, which aims to boost investors’ confidence in government debt and help eurozone countries avoid default, would continue.

Trichet was unable, however, to specify the duration of the controversial program, which was not unanimously accepted by the ECB governing council and some fear could stoke inflation.

He said the plan, which the ECB had last month dismissed as unnecessary days before market turmoil forced it to adopt it, was not creating any long-term threats to inflation because the bank is withdrawing the longer-term liquidity.

Trichet stressed at a press conference the bond purchases “are fully consistent with our mandate and by construction temporary in nature.” He emphasized the bank remains “inflexibly attached” to price stability.

To complement the bond program, the ECB said it would try to ease tensions in credit markets by offering unlimited amounts of 3-month loans.

Because of worries associated with the debt crisis, lending rates between banks have been rising in recent weeks, threatening to choke off credit to the wider economy, as occurred in 2008 after the U.S. investment bank Lehman Brothers collapsed.

“The ECB maintained a supportive stance today,” said Jennifer McKeown, senior European economist at Capital Economics. Both the short-term loans and the bond plan “certainly seem warranted,” she said.

Markets remain jittery — the euro has hit a series of four-year lows to trade below $1.19 this week — but Thursday’s announcements helped the 16-country common currency rise above $1.21 from about $1.2040 earlier in the day.

The decision to keep interest rates at the record low of 1 percent was widely expected, and analysts forecast it will stay there for a while yet.

Depending on how they are done, bond purchases by a central bank can increase the supply of money in the economy, which can both stimulate growth and cause inflation, undercutting the future value of the euro.

Trichet has been at pains to point to differences between the ECB’s actions and so-called quantitative easing, which the Bank of England is doing and aims to increase the amount of money in an economy to make credit more available.

“We said very clearly that we would withdraw all the liquidity that will be supplied… and you could see this withdrawal of liquidity functioning week after week,” he said Thursday.

Trichet noted that “we withdraw exactly the level of liquidity we are injecting” — €16.5 billion ($19.82 billion) in the first week of the program, then €10 billion, €5.5 billion and €6.5 billion in the subsequent weeks. Otherwise, he said, “we don’t give any additional information.”

Immediate fears of default in Europe were averted by the European Union and International Monetary Fund’s €750 billion ($900 billion) package of cash and state loan guarantees to protect debt-laden countries in the eurozone. However, the impact of painful austerity measures on growth in future years has hurt the euro and raised worries of a double-dip recession.

Europe’s leaders say the euro rescue package must be backed up with drastic austerity measures to get debt under control — and shore up credibility in the fundamental rules that govern their 11-year-old currency.

Trichet said the ECB expects the eurozone economy to keep growing “at a moderate pace” in an “environment of continued tensions in some financial market segments and of unusually high uncertainty.”

The ECB forecast the eurozone economy will grow between 0.7 percent and 1.3 percent this year, a small upward revision from its last estimates in March which reflects the short-term impact of stronger activity worldwide.

But its forecast for 2011 growth was revised down slightly to between 0.2 percent and 2.2 percent, “reflecting mainly domestic demand prospects,” Trichet said.

Trichet twice skirted questions about the rapidity of the euro’s recent decline. The currency slid rapidly this year from more than $.150 last November in the wake of the Greek debt crisis.

“The euro is credible, keeps its value and it is a major asset for external and domestic investors,” he said.

The ECB chief welcomed actions taken by governments to tackle their budget deficits and highlighted the need for them to stick to their commitments.

“All countries must ensure that confidence in the sustainability of public finances is guaranteed,” he said — adding that “structural reforms leading to higher growth and employment are crucial to support a sustainable recovery.”

Earlier Thursday, the Bank of England also left its base interest rate at a record low of 0.5 percent for the 16th consecutive month.

The British economic recovery remains fragile and public spending cuts are expected to hamper future growth.