The European Central Bank faces a precarious – and high stakes – balancing act this week as it piles pressure on Italy and Greece to press ahead with fiscal austerity measures, while reassessing its interest rate strategy amid deteriorating global and eurozone economic prospects.

The euro’s monetary guardian has a pivotal role in what could prove the most perilous phase of the eurozone debt crisis, with its government bond purchasing programme providing a backstop against possible financial market turbulence.

At the weekend, the priority of Jean-Claude Trichet, president, was to ensure Italy met fiscal targets agreed last month: the ECB is alarmed at Rome’s watering down of planned tax and spending measures. Firm action would be “absolutely decisive,” he said in Cernobbio, north Italy. But he would not comment on whether purchases of Italian bonds would continue; the ECB’s strategy will be to keep the maximum pressure on Rome while averting financial market meltdown.

The bond purchase programme, which has so far seen the ECB acquiring €115bn in government debt, will be reviewed on Thursday by the 23-strong ECB governing council’s interest rate setting meeting. So too, will stalled talks over fiscal and structural reforms in Greece – which has a much smaller economy that Italy but could still create a serious economic shock if allowed to default. Officials from the ECB, International Monetary Fund and European Commission quit Athens last week pending fresh action by the Greek government.

Even without the escalating debt crisis, the governing council would have taken a gloomier view of growth prospects. While the ECB had already factored-in a weaker second half of the year, it has been surprised by the weakness of the US economy, which it is likely to conclude has heralded a pronounced global slowdown.

Mr Trichet spoke with Ben Bernanke, US Federal Reserve chairman, at the Jackson Hole, Wyoming, gathering of central bankers in late August. Within hours of his return to Europe last week, Mr Trichet last week said medium term inflation risks were “under study” – a phrase widely seen as signalling a rethink.

So far this year, the ECB has reacted more aggressively to inflation risks than the Fed or Bank of England. In both April and July it raised official borrowing costs by a quarter percentage point.

Revised inflation forecasts on Thursday may have changed little from June’s projections, when the ECB expected a rate this year in a range with a midpoint of 2.6 per cent, falling to 1.7 per cent in 2012 – within the ECB’s target of an rate “below but close” to 2 per cent. Previously, however, inflation risks were seen on the “upside”. But with growth forecasts likely to be revised down significantly – and downward risks to such projections clear – the council is likely to conclude interest rates can remain firmly on hold at the current 1.5 per cent.

Mr Trichet’s comments on Thursday could still sound tough on inflation, however, and dash any expectations of an early cut in official borrowing costs. He faces hefty criticism in Germany over the bond purchasing programme – which was opposed by Jens Weidmann, Bundesbank president. German commentators fear the ECB is simply bailing-out Mr Berlusconi. Any sign of weakness on inflation as well, would further undermine German support.

Jörg Kramer, chief economist at Commerzbank, said worries about the ECB’s reputation “could be an add-on – but not a dominant factor”. He argued the ECB’s updated growth forecasts would, in any case, not justify a cut in interest rates.

That could change quickly, however, if the situation in Italy, Greece – or elsewhere in the global economy – were to escalate into a crisis on for example the scale of the 2008 collapse of Lehman Brothers.

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