The ECB decided to offer 12-month loans in unlimited amounts in an attempt to provide extra liquidity to troubled European banks. The Governing Council also decided to restart its covered bond purchase program, setting aside €40 billion for this program. The ECB kept interest rates at 1.5%, and while seeing inflation continuing to remain above the 2% target over the next few months, it also said that inflation will fall back afterwards.

The ECB focused on non-standard measures in this meeting, and Trichet did not drop any hints in regards to whether there will be interest rate cuts coming in the next few months.

We previewed both of these options yesterday in our article yesterday: ECB Rate Decision: Breaking Down 4 Main Policy Options

From the Introductory Statement: Inflation has remained elevated and incoming information has confirmed our view that inflation is likely to stay above 2% over the months ahead but to decline thereafter. At the same time, the underlying pace of monetary expansion continues to be moderate. Ongoing tensions in financial markets and unfavourable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of this year. The economic outlook remains subject to particularly high uncertainty and intensified downside risks.

The restarting of the covered bond purchase program should help to boost risk as it shows that the ECB is taking further non-standard measures to try and help alleviate the Euro-zone debt crisis.

The Euro rose a bit after the ECB launched a 12-month refinancing operation starting in October, alongside with purchasing covered bonds in the secondary market. But with downside risks to the Euro-zone economy a major concern, the EUR could not sustain any gains.

Nick Nasad
Chief Market Analyst