European Central Bank president Jean-Claude Trichet said threats to the euro region had worsened and inflation risks had eased, giving officials the option to take further action should the debt crisis worsen.
The economy faces “particularly high uncertainty and intensified downside risks,” Trichet said at a press conference in Frankfurt on Thursday, after the ECB left its benchmark rate at 1.5 per cent. While monetary policy is still “accommodative,” financing conditions have worsened in parts of the euro region and the ECB stands ready to pump more cash into markets, should that be required, he said.
The yield on German 10-year bonds fell to a record, as some investors speculate the ECB could cut interest rates or open more emergency credit lines for banks.
The spreading debt crisis is sapping confidence in Europe’s financial institutions, driving market borrowing costs and forced the ECB to widen its bond purchase programme to Italy and Spain. The ECB also cut its growth forecasts for this year and next and abandoned its warning about looming inflation threats.
“The situation has deteriorated so much that they should throw the kitchen sink at it,” said Julian Callow, chief European economist at Barclays Capital in London.
