ECB extends its bank liquidity lifeline into 2011

The European Central Bank (ECB) extended its liquidity safety net for vulnerable Eurozone banks into next year, delaying its exit from crisis measures for now as it urged caution about the economic recovery.

The ECB left rates at a record low of one per cent for the 16th month in a row yesterday and said policy remained accommodative as the region battles with an uneven recovery and concerns about bank vulnerability.

ECB staff raised economic growth forecasts but President Jean-Claude Trichet said risks were to the downside and the recovery would be moderate with uncertainty prevailing. “We have to remain cautious and prudent. We don’t declare victory,” he told his monthly news conference, although he said a double-dip recession was not on the cards.

The ECB extended its promise to lend banks unlimited one-week and one-month funds until at least 18 January, keeping liquidity flush through the tense end-of-year period in a move which should keep market rates low. It will also offer unlimited funds at three-month operations until December although the cost of these will not be fixed in advance, rather indexed to the ECB’s policy rate.