ECB holds rate and dismisses bond buy talk

THERE was no discussion of the European Central Bank (ECB) buying government bonds during the monthly meeting of its governing council, ECB president Jean-Claude Trichet said at the press conference in Lisbon following the decision yesterday to keep rates on hold at one per cent.

Ahead of the meeting, some analysts had seen buying government bonds as one of the few options left open to the ECB to deal with the debt crisis in Greece. However, Trichet dismissed such speculation and gave no indication that the ECB would introduce new measures.

The non-conventional liquidity measures remained in place for both the one-week and one-month operations, he stressed. “That’s absolutely clear, and we have their full allotment [of] fixed-rate supply of liquidity,” he added.

The euro fell to a new 14-month low of $1.2692 against the US dollar and two-year debt yields hit a record low after Trichet said the bank had not discussed buying bonds.

The ECB kept its forecast for the Eurozone economy. “We expect the euro area economy to expand at a moderate pace in 2010, but growth patterns could be uneven in an environment of high uncertainty,” Trichet said.

He added that rising global inflationary pressures did not yet threaten price stability where domestic price pressures remain low. He repeated that the current level of interest rates remained appropriate, dampening any speculation that the ECB would move from its current position.

Economists were generally in agreement with Trichet. Marie Diron, Ernst & Young’s chief Eurozone Economics Forecast advisor, said: “The ECB faces difficult months ahead, as it will want to tighten liquidity provision while the economic environment remains volatile and uncertain. Current economic developments give conflicting signals about the economic outlook in the Eurozone and the inflation picture has also become somewhat more blurred recently.”