Emergency help to avoid a year-end funding crisis has been announced by the European Central Bank in the wake of fresh money market tensions.
The ECB will take the exceptional step of extending a regular money market operation by an extra week to cover the Christmas holiday and year end, when financial institutions will be under huge pressure to put their books in order.
The move, which follows a similar announcement by the US Federal Reserve, was agreed by the ECB’s governing council by teleconference on Thursday. It followed a fresh surge in one-month and three-month interest rates and suggested that the council is all but certain to keep the ECB’s main interest rate on hold at 4 per cent when it meets next Thursday in Frankfurt.
Inflation surged to 3.0 per cent in November, from 2.6 per cent in October and the highest for more than six years, according to a “flash” estimate by Eurostat, the European Union’s statistical office. But the uncertainties created by the global credit squeeze and the dangers to exports of a soaring euro have left the ECB with little room for manoeuvre. The ECB aims to keep inflation “below but close” to 2 per cent.
Jean-Claude Trichet, ECB president, pledged earlier this month to await further information on the impact of the global credit squeeze before drawing conclusions for monetary policy.
In its statement, the ECB said that the amounts of additional emergency funds it injected into money market would be aimed at keeping market interest rates in line with its main policy rate. An operation scheduled for December 19 would now mature on January 4, 2008. Moreover, a separate operation scheduled for December 28 would allow “further liquidity demands to be satisfied”.
Its comments were the latest in a progressively more aggressive series of pledges to ensure money markets function normally and prevent market interest rates soaring too high.
Separately, further evidence emerged of a slowdown in eurozone economic growth. November’s “economic sentiment” index published by the European Commission fell to the lowest since March 2006. Although economic activity has generally remained robust across the 13-country region, it has faced a number of headwinds. The credit squeeze has driven up financing costs for business and consumers, as well as creating uncertainty. The stronger euro has hit exporters while higher inflation has reduced consumer spending power.
But at 104.8, down from 106.0 in October, the economic sentiment index was still high by historical standards.