Jean-Claude Trichet, European Central Bank president, speaking at a press conference in Frankfurt, Aug 04, 2011

Jean-Claude Trichet, European Central Bank president, said today that the ECB has resumed bond purchases and will provide more liquidity to banks, as the slowing economy and the debt crisis has triggered market pressure on Italy and Spain.

“I wouldn’t be surprised that before the end of this teleconference you would see something on the market,” Trichet told a press conference in Frankfurt today after the ECB kept its benchmark interest rate unchanged at 1.5%. “We were not unanimous but with overwhelming majority with regards to the bond purchases.”

Since May 2010, the ECB has purchased €74bn of bonds issued by the Greek, Irish and Portuguese governments. However, the programme has been inactive since March.

Reuters reported that the ECB was in the secondary market buying bonds that were issued by Portugal and Ireland.

Bloomberg reports that Italian and Spanish 10-year bonds declined, pushing the yields to 6.15% and 6.25% respectively. Irish and Portuguese bond rose as people with knowledge of today’s transactions said the ECB bought those securities, pushing the yields on their debt to 10.06% and 10.62, respectively.

Private sector purchasing managers' index data issued this week showed that the Eurozone economy was close to a standstill.

However, Germany's economics ministry reported today that manufacturing orders were up 1.8% in June.

The ECB will lend euro-area banks as much money as they need for six months and extend its existing liquidity measures through the end of the year, Jean-Claude Trichet said.

Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast (EEF) comments on today's ECB interest rate decision:“The ECB seems largely undeterred by recent developments and keeps pointing to further rate increases in interest rates. Unless developments turn much more negative, the ECB has signalled that it will likely raise interest rates in October. We think that this tightening of monetary policy is unhelpful, at best. It will add to the burden of peripheral countries and dampen fragile growth in the core Eurozone countries.
 
“The ad-hoc provision of extra liquidity announced today is helpful in the short term but it is not enough to stem the current crisis. As expected, the ECB has rejected to announce a step up in its bond purchase programme to help relieve tensions on the Spanish and Italian bond markets. Within a few months, the EFSF will be able to take over from the ECB and purchase bonds, but Spain and Italy may not have that much time. Trichet was careful to highlight that the bond purchase programme was active, surely to leave the door open to purchases in the future. But by being so reluctant to embrace this policy the ECB is undermining its effectiveness since financial markets cannot rely on the ECB acting as a lender of last resort to governments.  
 
“The ECB continues to qualify risks to the growth outlook as balanced. This strikes us as a very optimistic assessment. True, there are some upside risks, in particular related to companies’ favourable cash positions that could lead to faster investment than we currently envisage. But these upside risks are dwarfed by major downside risks, the probability of which has significantly increased in the past few weeks. Should tensions on Spanish and Italian bond markets escalate further, it is far from certain that an adequate policy response would come quickly enough to prevent the Eurozone from being engulfed in a crisis that could push the economy back into deep recession.”

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