JEAN-CLAUDE TRICHET, president of the European Central Bank (ECB), yesterday staunchly defended the central bank’s decision to buy government bonds and said the ECB would extend its liquidity support measures.
He said: “It’s appropriate to continue to do what we’ve decided.” The ECB also kept interest rates at one per cent. When asked about Governing Council member Axel Weber’s public criticism, he said: “There is one currency, there is one ECB, there is one Governing Council and...there is only one decision.”
However, he refused to give details of the nationalities or quantities of bonds purchased besides a weekly total announced by the central bank. He also gave no indication about how long the programme would last.
The Governing Council’s statement included a new phrase defending its price stability mandate. While this was intended to reassure markets, there were concerns among economists about the ECB’s capability to communicate policy. “Trichet yet again failed to provide a coherent picture of where monetary policy is heading. The overriding impression is one of complacency and impotence in the face of grave risks to certain member countries,” warned Lombard Street Research’s Jamie Dannhauser.
The decision to extend its longer-term refinancing operation reflects an acknowledgment of renewed funding tensions for banks and represents a partial reversal of its exit strategy as set out in March, according to Societe Generale’s James Nixon. There have already been reports of a complete freeze in the inter-bank lending market in the Eurozone.
The ECB also revised down its 2011 growth forecast to 1.2 per cent from the 1.5 per cent in March. Inflation was revised up marginally to 1.6 per cent. This suggests that the ECB envisages a remarkably flat and lack lustre recovery, analysts said.