ECB to Keep Buying Bonds to Fight Crisis 06-10

Trichet Says ECB to Keep Buying Bonds to Fight Crisis

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By Simone Meier and Jana Randow

(Corrects value of bailout package in 11th paragraph.)

June 10 (Bloomberg) -- Jean-Claude Trichet said theEuropean Central Bank will extend its offerings of unlimitedcash and keep buying government bonds as it tries to easetensions in money markets and fight the European debt crisis.

“It’s appropriate to continue to do what we’ve decided”on purchases of sovereign and corporate bonds, Trichet, whoheads the ECB, said at a press conference in Frankfurt today.Earlier, the central bank kept its benchmark interest rate at 1percent. “We have a money market which is not functioningperfectly.”

The ECB is buying state debt and pumping unlimited fundsinto the banking system as part of a strategy by European policymakers to stop the euro region from breaking apart. WhileTrichet refused to bow to some investors’ demands for moredetails on the bond purchases, he said the ECB plans to offerfurther help to banks struggling to raise cash in money markets.

“The ECB is really in fire-fighting mode and is no longerthinking about exit,” said Nick Kounis, chief Europeaneconomist at Fortis Bank Nederland NV in Amsterdam. “Interestrates will be lower for longer because of this euro-regionsovereign debt crisis.”

The ECB will give banks access to unlimited funds overthree months at a fixed rate in July, August and September, saidTrichet. The Frankfurt-based central bank has used the measureas one of its key tools to bolster financial markets since thecollapse of Lehman Brothers Holdings Inc. in September 2007.

Track Record

The euro rose during the press conference, strengthening asmuch as 1.1 percent to $1.2123 at 4:45 p.m. in Frankfurt. Thesingle currency has shed 15.5 percent against the dollar thisyear.

The Bank of England today also kept its main rate unchangedat a record low of 0.5 percent and left the target for its bondholdings at 200 billion pounds ($292 billion).

Trichet defended the ECB against critics who say the bondpurchases amount to bailing out indebted governments and couldfuel inflation, breaching two of the central bank’s foundingprinciples and undermining its credibility.

“We have the best track record on price stability over 111/2 years in Europe and among the legacy currencies,” Trichetsaid. “What we have done and what we do with the same purposeis to help restoring an appropriate functioning of the monetary-policy transmission mechanism.”

Temporary Plan

Trichet refused to be drawn on the duration of the bondplan, saying it would be “temporary.” While the central bankdoesn’t immediately plan to issue debt certificates to mop upthe excess liquidity pumped into markets through bond purchases,all options are being considered, he said.

Investor concern that a Greek deficit crisis will spreadacross the 16-member euro region last month prompted Europeanleaders to pledge a bailout package worth $910 billion andforced the ECB to reverse its withdrawal of emergency stimulusmeasures. Economists have also pushed back forecasts for higherinterest rates until the second quarter of next year.

New York University economist Nouriel Roubini, whopredicted the financial crisis, said in an interview today thatthe ECB should cut its main lending rate to zero. Billionaireinvestor George Soros said today that the global economy justentered “act two” of the crisis.

“We now expect the ECB to keep interest rates down at thecurrent level of 1 percent not only through 2010 but deep into2011,” said Howard Archer, chief European economist at IHSGlobal Insight in London. “The ECB may well have to continue toengage in non-standard measures for some considerable time tocome.”

Forecast

The ECB today raised its euro-region growth forecast forthis year and cut it for 2011. The central bank expects theeconomy to expand around 1 percent in 2010 compared with aprevious forecast of around 0.8 percent. It will grow about 1.2percent in 2011, lower than an earlier projection of around 1.5percent because of weaker domestic demand, said Trichet.

The central bank raised its inflation forecasts. Consumerprices will rise around 1.5 percent in 2010 and 1.6 percent in2011, Trichet said. That compares with a previous projectionthat inflation would be around 1.2 percent in 2010 and 1.5percent in 2011.