The ECB signaled that emergency lending measures will gradually come to an end (Photo: European Community)
ECB signals exit from emergency lending
06.11.09 @ 09:17
The European Central Bank left eurozone interest rates unchanged at one percent on Thursday (5 November), but signalled it will start a gradual exit from emergency lending measures initiated since the credit crunch began.
"Not all liquidity measures will be needed to the same extent as in the past," the bank's president, Jean-Claude Trichet, told journalists.
"Enhanced credit support on which we embarked is not for eternity," he added.
Since global credit supplies started to dry up in mid-2007, the ECB has flooded the financial sector of the 16-member eurozone with huge amounts of liquidity in a bid to help banks lend to the wider economy.
The institution scrapped its previous policy that forced euro area banks to bid for a limited amount of central bank funds, and also widened the range of collateral it would accept.
In addition, it set up a €60 billion bond-purchasing programme and introduced a system of one-year loans that provide banks with unprecedented refinancing assurances.
These one-year loans, at an interest rate of one percent, have been the centre-piece of the ECB's so-called "enhanced credit support" strategy.
June saw the Frankfurt-based institution pump €442bn in one-year loans into the banking system – the largest amount ever provided in a single market operation.
But current data suggest that much of the extra liquidity provided to the banking system is still not being relayed to businesses and households, and is instead being hoarded by banks.
"We expect [past] policy action will progressively feed through to the economy," said Mr Trichet on Thursday in recognition of this fact.
The ECB president signaled that the next provision of the exceptional one-year loans, planned for December, would be the last.
He also urged governments to prepare "ambitious" fiscal exit strategies in the face of their ballooning budget deficits.
Other central banks around the world are also preparing to ease off on emergency measures designed to prevent a second great depression like that seen in the 1930s.
The euro rose against the dollar following Mr Trichet's comments.
