The European Central Bank offered new emergency loans to banks today to help them through the turmoil of the continent's government debt crisis — but decided against an interest rate cut despite mounting fears of another recession.
Bank president Jean-Claude Trichet, holding his last news conference before retiring at month's end, did not even indicate that a rate cut was possible at the next month's meeting.
Many economists have predicted the bank will have to cut its key refinancing rate from 1.5 percent in coming months to stave off a rapid economic downturn. But if the ECB keeps to its habit of signaling moves at least a month ahead of time, that would mean no cut before December at the earliest.
"The economic outlook remains subject to particularly high uncertainty and intensified downside risks," Trichet said, adding however that "at the same time interest rates remain low."
He noted that inflation, the ECB's main focus as the monetary authority for the 17-nation euro, will likely remain well above target for months.
Trichet will leave office to his successor, Mario Draghi, with his typical stance — as a strict inflation fighter who has repeatedly touted the bank's record on keeping prices under control. Lower rates can mean a short-term boost to growth and jobs. But rates that are too low can cause inflation over the longer term and undermine the value of the currency.
Instead of cutting rates, Trichet focused on emergency credit measures to keep the financial system working properly.
Jitters in the banking sector have intensified in recent weeks and threaten to claim their first victim since the 2007-2009 financial crisis, Franco-Belgian bank Dexia. Dexia was already bailed out in the earlier phase of the crisis and now is struggling to raise funding.
To avoid a new credit crunch like the one that cut off credit to businesses and plunged the world economy into its sharpest recession since World War II, the ECB decided to flood the financial system with all the loans it needs.
The bank will offer an unlimited amount of 12-month and 13-month loans to banks. That will provide banks financing for a longer period — into 2013 in the case of the 13-month offering — and shield them from turbulence in borrowing markets.
The ECB will also keep offering unlimited amounts of credit at its shorter-term lending operations of up to 3 months through the first half of next year.
Many European banks are exposed to losses on Greek debt. That has made borrowing between banks, crucial for their daily functioning, increasingly difficult because of fears the money might not be repaid.
Trichet said the ECB would also buy up to €40 billion ($53 billion) in covered bonds, a type of security used by banks to raise funding. The ECB's presence will help free up that credit market and make borrowing easier for banks.
The bank has maintained throughout the crisis that its unconventional measures such as extra credits are kept in a separate track from interest rate policy, and Thursday's decisions continued that stance.
Trichet said that the 23-member rate-setting council made its interest rate decision by consensus, not by unanimity, suggesting not everyone agreed.
The bank's caution to not boost growth contrasted with the Bank of England's decision earlier Thursday to buy another £75 billion ($116 billion) in securities from banks, a step which expands the supply of money in the economy and can promote economic activity.
That makes the Bank of England the first major central bank to move to counterract the slide in global growth that has intensified since this summer.
The ECB's main role under the EU treaty is defending against inflation, which unexpectedly spiked to 3.0 percent in the eurozone in September from 2.5 percent the month before. The ECB expects inflation to fall below 2 percent by next year.
It was that role that Trichet focussed on as he reminisce briefly about his eight years in office, pointing to both the bank's record at keeping inflation close to its goal of just under 2 percent over the nearly 13 years of its existence, and at keeping money market inflation expectations in line with that.
"Have we delived price stability? Yes, we have delivered price stability," he said. "Are we credible in delivering price stability over the next 10 years? Yes. These are not words, these are deeds."
"On top of that we have to cope with the worst crisis since World War II," he said.