The European Central Bank held interest rates at a record low today as renewed financial-market tensions complicate its exit from crisis mode.
The ECB's Governing Council meeting in Frankfurt set the benchmark lending rate at 1 per cent for an 18th month, as predicted.
President Jean-Claude Trichet is due to hold a press conference this afternoon.
Near-record borrowing costs for nations across the euro region's periphery are making it harder for the ECB to wean commercial banks off the cheap cash it provided to fight the financial crisis.
At the same time, slowing global growth is prompting the world's other major central banks to consider further measures to prop up their economies.
The Bank of England today left its key rate at 0.5 per cent and maintained its asset-purchase program at £200 billion.
The Bank of Japan this week dropped its interest rate to "virtually zero" and expanded its asset-purchase program, while the Federal Reserve has indicated it may do more to stimulate growth.
The ECB meets after a month in which tensions in European credit markets intensified. Irish 10-year bond yields soared to a record versus German bunds on September 29th on concern the bailouts of Anglo Irish Bank and Allied Irish Banks would overwhelm government finances. The Portuguese-German 10-year yield spread, which hit a record on September 28th was at 400 basis points today, up from 88 basis points on March 10.
The ECB's response to the financial crisis was to lend banks as much cash as they needed at its benchmark rate for as long as 12 months. While it has phased out its 12- and 6-month loans, the central bank still lends unlimited amounts in its weekly, monthly and three-month tenders.
In May, it was forced to reintroduce the unlimited three-month loans and start buying government bonds as Europe's deepening debt crisis started to threaten the survival of the euro. Now policy makers are voicing concern that some banks' reliance on the funds may prevent the ECB from exiting its emergency measures when it sees fit.
REUTERS