ECB takes new steps to ease markets

ECB takes new steps to ease markets

By Ralph Atkins in Frankfurt

Published: March 28 2008 20:34 | Last updated: March 28 2008 20:34

Fresh measures to combat financial market tensions were unveiled by the European Central Bank on Friday, even as scares about eurozone inflation further reduced the scope for cutting its main interest rate.

Extending its armoury, the ECB announced its first injections of six-month money into eurozone markets. A €25bn operation will be launched next week, while a second in July will extend beyond the end of this year. The Frankfurt-based institution will also continue additional injections of three-month money.

The moves follow recent surges in market interest rates and point to heightened ECB concerns about the unfolding global financial crisis. The measures were aimed “at supporting the normalisation of the functioning of the euro money market”, it said.

But an unexpected acceleration in German inflation on Friday suggested the ECB’s main interest rate would remain firmly at 4 per cent in spite of sweeping cuts by the US Federal Reserve.

Axel Weber, president of Germany’s Bundesbank, expressed alarm about recent inflation trends and hinted interest rates increases could not be ruled out. He said in Luxembourg that the ECB would “act if necessary” to secure price stability.

However, the ECB knows that tougher talk on interest rates could lead to further upward pressure on the euro, which is already at record levels against the dollar and on Friday hit a fresh high against sterling.

Eurozone inflation data on Monday could show the annual rate for the 15-country region rising to a 16-year high of as much as 3.5 per cent this month, economists said. Eurozone growth figures for the first quarter could also be better than expected, said Jürgen Stark, an ECB executive board member.

Since the start of the financial crisis last August, the ECB has drawn a clear distinction between its actions to ease market tensions and its main interest rate policy, aimed at combating inflation. Even though the ECB believed the current level of interest rates would suffice, “the bank is under huge pressure to explain why it is not responding to this surge in inflation”, said Jacques Cailloux of Royal Bank of Scotland.