Trichet May Keep ECB in Crisis Mode on Economic Growth Concern

Source: Bloomberg

European Central Bank (ECB) President Jean-Claude Trichet may signal that the bank will stay in crisis mode into next year as the risk of a renewed US recession threatens the euro region’s economic rebound.

Policy makers meeting Thursday in Frankfurt are likely to extend emergency lending measures for banks into 2011, economists said. The ECB’s 22-member Governing Council will also leave the benchmark interest rate at a record low of 1

per cent, according to all 57 economists in a Bloomberg News survey.

While the ECB will probably raise its growth forecasts Thurs- day after Europe’s economy expanded at the fastest pace in four years in the second quarter, US indicators are pointing to a slackening in activity. ECB council member Axel Weber said in an August 19 interview that the ECB should help banks through end-of-year liquidity tensions before determining early next year when to withdraw emergency measures.

Weber said in the Bloomberg interview it would be “wise” to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of the year, which is “usually surrounded by some uncertainty regarding the liquid- ity situation.”

The ECB in June predicted growth of 1 per cent this year and 1.2 per cent in 2011. The economy expanded 1 per cent in the second quarter from the first, driven by a 2.2 per cent growth in Germany. In the same period, the US economy’s comparable quarter-on-quarter growth rate was 0.4 per cent.

European economic growth may slow as governments reduce spending to tackle bloated budget deficits and the global recovery shows signs of losing momentum. Orders for durable goods in the US increased less than forecast in July, a sign one of the few remaining bright spots in the economy is cooling, while China’s industrial output growth weakened.