ECB unveils measures to fight recession

ECB unveils measures to fight recession
By Ralph Atkins in Frankfurt and David Oakley in London
Copyright The Financial Times Limited 2009
Published: May 7 2009 12:46 | Last updated: May 7 2009 14:58
http://www.ft.com/cms/s/0/287034fc-3aee-11de-ba91-00144feabdc0.html


The European Central Bank sought to kickstart the flagging eurozone economy on Thursday by reducing interest rates to record lows and announcing bold plans to buy corporate bonds as part of a credit easing programme.

The ECB cut its main interest rate by a quarter-point to 1 per cent, pledged to buy €60bn in covered bonds issued by eurozone companies and said it would lend banks unlimited funds for up to 12 months.

Jean-Claude Trichet, president of the ECB, said financing operations would be extended to 12 months from the current six months in an effort to encourage banks to lend longer-term.

Money market rates have hit record lows in recent weeks in response to the ECB’s generous liquidity provision and interest rate cuts but lending growth to firms and households is still slowing. Traders say lending beyond six months has virtually dried up.

The move on credit easing comes after months of deliberation about how the central bank should support the eurozone economy and follows similar measures announced by the Bank of England, the US Federal Reserve and Swiss National Bank.

Covered bonds are some of the safest corporate securities in the market place, as they are backed by the issuer’s balance sheet and typically hold a top-grade triple-A rating. Germany, Spain and France are the biggest issuers, which analysts said could favour these countries.

Mr Trichet said: ”These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help to improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises.”

Significantly, the ECB left unchanged, at 0.25 per cent, the interest rate on its deposit facility, which is used by banks to park funds overnight and has become an increasingly important benchmark for market interest rates. A zero interest rate policy would distort the economy, the ECB believes.

The 16-country eurozone – and especially Germany, its largest member – has been badly hit by the collapse in global demand since the failure of Lehman Brothers last September. Earlier this week, the European Commission forecast the eurozone would contract by 4 per cent this year – significantly faster than the US – with a recovery not expected until 2010.

Some signs have emerged that the pace of decline has slowed. German industrial orders provided further evidence of “green shoots,” rising unexpectedly by 3.3 per cent in March compared with February, according to the Berlin economics ministry. It was the first month-on-month rise since August. Foreign orders were up 5.6 per cent.

However, total German industrial orders were still 26.7 per cent lower than a year before.

At the same time, eurozone unemployment is rising steeply, and inflation is undershooting massively the ECB’s target of an annual rate “below but close” to 2 per cent. Annual eurozone inflation was just 0.6 per cent in April and is expected to turn negative in coming months.

That has increased the pressure on the ECB to consider “non-conventional” measures already being taken by the US Federal Reserve and Bank of England, for instance, to buy private sector or government debt.

So far, ECB efforts have focused on pumping unlimited amounts of liquidity into the banking system at a fixed interest rate. One likely option is that it will extend to 12 months, from the current six months maximum, the period over which it is prepared to offer such liquidity.

Since October, the ECB has cut its main interest rate by 325 basis points. But it has been among the last of the world’s main central banks to reach a point at which it feels official borrowing costs cannot go lower.

Eurozone credit growth has all but dried up. Companies and households made net repayments of debt in March, according to latest ECB figures. The annual growth rate of loans to households fell to just 0.4 per cent.