ECB keeps liquidity safety net for banks

The European Central Bank has extended its liquidity safety net for vulnerable eurozone banks into next year, delaying the end of its crisis measures and urging caution over the economic recovery.

The ECB left rates at a record low of 1 per cent for the 16th month in a row yesterday and said its policy remains "accommodative" as the region battles with an uneven recovery and concerns over bank vulnerability.

ECB staff raised economic growth forecasts but its president, Jean-Claude Trichet, warned that continuing uncertainty meant the recovery would only be moderate.

"We have to remain cautious and prudent. We don't declare victory," he told his monthly news conference, although he added that 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 Mr Trichet said the decision should not be taken as a signal the ECB was preparing to raise rates, analysts said it was positioning itself to wind back liquidity support in early 2011 as a precursor to raising policy rates.

The use of the word "accommodative" to describe policy – a term that has been absent from the introductory statement for three years but that became a key word during the last tightening cycle in 2006 and 2007 – also raised eyebrows.

The extension maintains a lifeline for banks in countries such as Spain, Ireland and Greece.

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