ECB offers banks liquidity but no cut in interest rates

The European Central Bank will step up its support for struggling banks after deciding against lowering interest rates at what was Jean Claude Trichet's last policy meeting before he steps down as the central bank's president later this month.

The ECB governing council held rates at 1.5 per cent when it gathered in Berlin yesterday, although Mr Trichet, speaking after the announcement, acknowledged the "particularly high uncertainty and intensified downside risks" colouring the economic outlook. "Ongoing tensions in financial markets and unfavourable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of the year," he said.

The decision prompted criticism from Angel Gurria, the head of the Organisation for Economic Cooperation and Development, who said: "I would have gone for a cut in the rate if I had something to do with it, simply because I think our greatest concern now is growth."

The ECB did, however, take action to aid European banks by announcing plans to resume lending money to those struggling to raise funds at benchmark rates for around one year.

The decision to lengthen the duration of funding from six months came as the European Commission said it was readying plans for coordinated action to strength lenders' capital buffers. Earlier, the European Banking Authority, which sets the parameters of banking stress tests, said it was reviewing lenders' capital positions.

Mr Trichet said the ECB would also resume purchases of covered bonds, which offer investors claims on mortgages and public sector loans, and are seen as among the safest of securities. The steps are aimed at boosting liquidity across the European banking system amid growing nervousness about exposures to debt issued by troubled countries on the continent's periphery.

The Franco-Belgian lender Dexia has been at the centre of such concerns in recent days. Yesterday, its shares were suspended as it talked to investors about its options.