Trichet Says ECB to Extend Emergency Bank Lending

European Central Bank President Jean-Claude Trichet extended emergency lending measures for banks into 2011, remaining in crisis mode as the risk of a renewed U.S. recession puts the euro-area’s rebound in jeopardy.

The ECB will keep offering banks unlimited one-week and one-month loans until at least Jan. 18, Trichet told reporters in Frankfurt today. The ECB will also offer banks three-month loans in October, November and December at interest rates linked to the ECB’s average benchmark rate over the maturity of the loan.

Trichet spoke after the ECB Governing Council set the benchmark lending rate at 1 percent for a 17th month, as predicted by all 57 economists in a Bloomberg News survey. He said rates are “appropriate,” signaling no immediate plan to tighten monetary policy.

The ECB is trying to cement a euro-region recovery threatened by the possibility of a renewed U.S. recession and concerns about the fiscal health of some euro-region nations. Policy makers had previously committed to lend banks unlimited cash at the benchmark rate until at least Oct. 12.

“We have to remain cautious and prudent -- we don’t declare victory,” Trichet said today. “Monetary policy will do all that is needed to maintain price stability in the euro area over the medium term.”

The euro initially rose after Trichet’s remarks before giving up its gains. It traded at $1.2818 at 5:11 p.m. in Frankfurt, close to its level before the press conference.

‘Damp Squib’

Trichet said the decisions on refinancing, which were outlined two weeks ago by Bundesbank President Axel Weber and partly designed to help banks deal with possible year-end liquidity shortages, were taken by “consensus” rather than “unanimity.”

“These measures are too big to only tackle the end-of-the-year problem for banks,” said Carsten Brzeski, an economist at ING Group in Brussels. “They show that, despite the positive stress tests in July, the ECB is still concerned about the health of the financial system. After Axel Weber’s comments, today’s meeting was almost predetermined to become a damp squib.”

The ECB today raised its 2010 economic growth forecast to about 1.6 percent from 1 percent previously and Trichet said domestic demand is starting to help an economy still reliant on exports for growth. It lifted the 2011 projection to 1.4 percent from about 1.2 percent.

‘No Signal’

“When we look at the contribution to growth, we have the sentiment that now domestic demand, both consumption and investment, is there,” Trichet said. Still, the euro area still depends “very much on exports,” he said. “We have to be prudent for the profile of next year.”

Trichet said that the decision to link the rate on three-month loans to the average ECB rate over the period was a “technical” one and sent “absolutely no signal” of the ECB’s policy intentions.

“Overall, the ECB is becoming more confident about the recovery but is not yet thinking about making policy less accommodative,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “We think the central bank will probably end its policy of unlimited allotment at the end of the first quarter.”

At the same time, Trichet strengthened his language on inflation, saying risks are “slightly tilted to the upside” after describing them last month as “broadly balanced.” The ECB today raised its inflation forecasts for this year and next by 0.1 percentage point to about 1.6 percent and 1.7 percent, respectively.

Balance of Risks

“The change in the balance of risks to inflation is important,” said Laurent Bilke, an economist at Nomura International and a former ECB forecaster. “Is there anything else that matters more for the ECB than the balance of risks to price stability?”

While most of the euro region’s 16-nation economy is now recovering, investors are still concerned about the finances of some member countries. The premiums investors charge to hold Greek, Spanish and Irish debt over German bunds are wider than they were before a European Union-led rescue package was announced on May. 10.

The yields were little changed during the Trichet press conference.

The Federal Reserve announced on Aug. 10 it will buy Treasuries to prevent its balance sheet falling below $2.05 trillion and keep interest rates from rising, saying U.S. growth will be slower than anticipated. The Bank of Japan said three days ago that it added 10 trillion yen ($119 billion) in liquidity injections after a surge in its currency to a 15-year high threatened growth.

In Europe, foreign sales are powering growth. Euro-area exports jumped 4.4 percent in the second quarter, the biggest gain since data were first compiled in 1995, the European Union’s statistics office in Luxembourg said today.

Trichet today declined to comment on European Union plan to limit so-called naked short sales of shares and government debt.