The European Central Bank has announced a fresh six-month loan operation, providing under-pressure banks with easier funding, due to tensions in euro zone money markets. ECB president Jean-Claude Trichet also signalled to reporters that the ECB was buying euro zone government bonds in the markets this afternoon. This was later confirmed by market sources. The ECB had previously ended six-month loan operations, which were one of the exceptional measures taken during the global financial crisis to ensure that the banking system had enough liquidity. 'The governing council today decided to conduct a liquidity providing supplementary longer term refinancing operation (LTRO) with a maturity of approximately six months,' ECB President Jean-Claude Trichet told reporters in Frankfurt. He was speaking after the bank kept its main lending rate unchanged at 1.5%.
The euro zone debt crisis has put Italy and Spain under huge pressure in recent weeks after Greece, Ireland and Portugal had to be bailed out by the EU and International Monetary Fund. The banks, who hold large amounts of government bonds issued by these weaker euro zone countries, have in turn come under pressure, finding it more difficult and increasingly costly to raise fresh funds from the markets. Mr Trichet also said the bank would continue to 'monitor very closely' inflation risks in the euro zone.
He had used the same 'monitor very closely' phrase last month when the bank raised rates to 1.5%. It is usually seen as signalling that another interest rate rise is likely at some point, but not in the short-term. The ECB has raised rates twice this year in an effort to combat euro zone inflation, which eased to 2.5% in July. Mr Trichet also said recent figures had shown a slowing in the pace of economic growth, and there was particularly high uncertainty about the outlook.