ECB resumes bond buys, boosts funds to banks

The European Central Bank resumed buying government bonds from the market and offered a new round of funding to commercial banks on Thursday in response to a worsening eurozone debt crisis. But analysts said the intervention was unlikely to ease market tensions for long and some were worried by ECB President Jean-Claude Trichet's suggestion that official interest rates could rise further, would put more pressure on weak economies in the region.
--- Bank holds rates as eurozone recovery stutters
--- Trichet signals official rates may rise further
"It is true that we are experiencing a high level of uncertainty, not just in the eurozone," Trichet said after the central bank's monthly monetary policy meeting, which left its main policy rate flat at 1.5 percent. The European Central Bank held interest rates at 1.5 percent on Thursday, pausing a policy tightening cycle it began in April in the face of growing evidence the eurozone's economic recovery is losing momentum.
Eurozone year-on-year inflation slowed in July to 2.5 percent, though remained well above the ECB's target of just under 2 percent. The 17-country bloc's central bank increased its rates previously in June and April, when it become the first major central bank to lift interest rates after the intensification of the financial crisis.
The ECB said the interest rate on its deposit facility would remain at 0.75 percent, and the rate on the marginal lending facility would stay at 2.25 percent. The ECB's decision to resume its emergency bond-buying programme, which had been suspended since March, was a major step for the central bank. Some of its policymakers dislike the programme intensely for compromising the ECB's core mission of controlling inflation, and Trichet acknowledged the decision to resume buying was not unanimous in the ECB Governing Council.
As he spoke, traders reported the ECB had entered the market to buy the bonds of Ireland and Portugal, pushing down their yields by about 0.2 percentage point at one stage. A European Monetary Source confirmed the intervention to Reuters. But the source also said the ECB had no plans to buy the bonds of other countries, even though it was the rise of Italian and Spanish yields to 14-year highs this week that has alarmed policymakers.
This, combined with the equivocal way in which Trichet announced the buying, limited the impact of the intervention. "I never said myself that (the programme) was dormant," Trichet said, adding that weekly ECB bond-buying data would show what actions had been taken by the central bank. "It is an ongoing programme and we are totally transparent," he said.
When the ECB introduced the bond purchasing scheme in May last year to support an international bailout of Greece, its buying was aggressive in the first week but tapered off in subsequent months before ceasing entirely. Investors fear the same may be true of this round of buying. "We doubt that the ECB's asset purchase programme can have a sustained impact on the tensions in the Spanish and Italian bond markets," said Nick Kounis at ABN-Amro.
The central bank has come under pressure to act because of an escalation of the eurozone crisis in recent weeks. The bond market's attack on Italy worries policymakers since European banks' exposure to that country's debt dwarfs that of the countries already bailed out - Greece, Ireland and Portugal.
Although eurozone governments plan to give the bloc's 440 billion euro bailout fund new powers to buy bonds and give weak states precautionary credit lines, this will not be possible until the changes are approved by national parliaments in late September at the earliest. That leaves the ECB as just about the only defence for the eurozone in the short term.
Trichet also said commercial banks would be allowed to continue borrowing as much money as they needed from the ECB until at least the end of this year, and announced a new ECB offer to the banks of six-month money. "Given the renewed tensions in some financial markets ... (the ECB)... also decided to conduct a supplementary refinancing operation with a maturity of approximately six months with full allotment," he said.
Some countries have been hoping the ECB will introduce a new, longer-term facility for bank funding, but while it considered such a step earlier this year, ultimately suspended the plan. Also worrying some investors was Trichet's signal that eurozone official interest rates could rise further, in contrast to monetary easing by the Swiss and Japanese central banks this week.
Although Trichet acknowledged that economic growth in the eurozone had slowed in the past few months, he predicted "continued moderate expansion" in coming months, fuelling concern that he might be underestimating the risk of a sudden, global slowdown. "We will continue to monitor very closely all developments with respect to upside risks to price stability," Trichet said, deploying the same phrase he used after the ECB raised interest rates last month. Economists said before the news conference that use of the phrase would signal a further rate rise this year, although markets are not pricing in any further tightening before 2012 given the eurozone debt crisis.