ECB To Buy Bonds, Sees Tentative Signs Of Stabilization -- Update

By @ibtimes on

European Central Bank President Jean-Claude Trichet said Thursday the central bank plans to buy euro-denominated covered bonds, joining the Federal Reserve and other central banks in buying debt under their quantitative easing policies.

At his press conference accompanying the ECB's decision to cut its key interest rate 25 basis points to a record-low 1.00%, Trichet said the ECB will conduct liquidity-providing longer-term refinancing operations with a maturity of 12 months.

At the same time, he noted some tentative signs in survey data of a stabilization, albeit at very low levels.

The central bank cut the interest rate on the marginal lending facility by 50 basis points to 1.75%. On the other hand, the interest rate on the deposit facility was left unchanged at 0.25%.

The Eurosystem will purchase euro-denominated covered bonds issued in the euro area, said Trichet, noting that further details will be announced after the Governing Council meeting of June 4, 2009.

The operations will be conducted as fixed rate tender procedures with full allotment. The rate for the first of these operations, to be announced in June, will be the rate on the main refinancing operations at that time. Subsequently, the fixed rate may include a premium to the rate on the main refinancing operations, depending on the circumstances at the time.

Other allotment dates are September 30, and December 16, respectively, the ECB said in a statement released after the press conference.

Trichet said that the European Investment Bank (EIB) will become an eligible counterparty in the Eurosystem's monetary policy operations.

As of July 8, the EIB will have access to the Eurosystem's open market operations and standing facilities through Luxembourg's central bank under the same conditions as any other counterparty.

Access to the Eurosystem's liquidity is a natural complement to the EIB's financing initiatives and will facilitate the accommodation by the EIB of additional demand for its lending programme, said the ECB in another statement after Trichet's press conference.

At present, this additional demand is estimated to be ?10 billion in 2009. Given the usual leverage ratios involved, it is estimated by the EIB that such additional financing could generate additional investment value up to ?40 billion this year.

Earlier today, the Bank of England maintained its key interest rate at 0.50%, saying it will scale up its asset-purchase program by 50 billion pounds to 125 billion pounds in an effort to lower borrowing costs.

Central banks in the U. S. and Japan are also buying bonds under their quantitative easing policies. The Swiss central bank has increased the number of long-term repo transactions. Further it is purchasing Swiss franc bonds issued by private sector borrowers and buying foreign currency on the open market.

Addressing the economic malaise gripping Europe, Trichet noted that economic activity continued to weaken in the euro area in the course of the first quarter of 2009, in parallel with the ongoing downturn in the world economy.

This weakening in the first quarter appears to have been significantly more pronounced than projected in March, said Trichet.

Still, he noted some tentative signs in survey data of a stabilization, albeit at very low levels.

Overall, economic activity is likely to be very weak for the remainder of this year, before gradually recovering in the course of 2010, predicted Trichet.

In terms of maintaining price stability, Trichet said that expectations remain firmly anchored in line with the Governing Council's aim of keeping inflation rates at levels below, but close to, 2% over the medium term.

Trichet insisted that once the macroeconomic environment improves, the unprecedented measures taken can be quickly unwound and the liquidity provided absorbed so that any threat to price stability over the medium to longer term can be effectively countered in a timely fashion.

The ECB's decision to offer a modest rate cut was in line with expectations. In the April session, the key interest rate was also lowered by a quarter point.

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