FRANKFURT — Once again using its firepower to try to calm market tension after efforts by euro zone governments failed, the European Central Bank unexpectedly intervened in bond markets Thursday in an apparent attempt to prevent the region’s sovereign debt crisis from engulfing Italy.
The E.C.B. also moved to prop up weaker banks that may be having trouble raising funds, expanding its lending to euro zone institutions at the benchmark interest rate. The E.C.B. left that rate unchanged at 1.5 percent on Thursday, while the Bank of England left its benchmark rate at a record low of 0.5 percent.
Jean-Claude Trichet, the president of the E.C.B., declined to say what bonds the bank was buying or how much. He said the bank acted in response to “renewed tensions in some financial markets in the euro area.” It was the first such intervention since March.
Mr. Trichet also said that uncertainty created by the U.S. budget debate had unsettled European markets. “It’s clear the entire world is intertwined,” he said. “What happens in the U.S. influences the rest of the world.”
As markets demanded higher risk premiums on Spanish and Italian bonds during the past week, analysts began to speculate that the E.C.B. would return to the bond market. But most had not expected the bank to act so quickly.
Yields on Spanish and Italian bonds fell Thursday, though experience shows the decline could be short-lived. Similar action last year helped push down yields on Greek debt, but they later rose to record levels.
The E.C.B. will not disclose the scope of its bond-buying until next week at the earliest, but early indications were that the amounts were relatively modest. “It might be interpreted as more of a warning shot rather than a broad-based onslaught,” analysts at Barclays Capital said in a note.
The E.C.B. also responded to signs of stress in interbank markets as banks, wary of each other’s exposure to troubled government paper, became reluctant to lend to each other. One worrisome sign was a spike in the cost for European banks to borrow dollars in the open foreign exchange market.
Mr. Trichet said that next week the E.C.B. would lend banks as much cash as they wanted for six months at the benchmark interest rate, assuming they can provide collateral. A six-month term is longer than is customary.
The bank’s actions on Thursday provided another example of the E.C.B. acting as the euro area’s firefighter after efforts by governments fell short.
European leaders decided last month to authorize the European Financial Stability Facility — the European Union’s bailout fund — to buy bonds in open markets, relieving the E.C.B. of that responsibility. But it will take months before the E.F.S.F. is able to start making purchases. In addition, European leaders did not increase the size of the fund, leaving questions about whether it would be up to the task if a country as big as Italy or Spain needed help.
Speaking to reporters after a regular meeting of the E.C.B. governing council, Mr. Trichet beseeched political leaders to speed up efforts to cut their budget deficits and remove impediments to growth, such as overly protected labor markets.
“The key for everything is to get ahead of the curve, in fiscal policy and structural reform,” he said.
Mr. Trichet also gave a more subdued view of the economy. “Recent economic data indicate a deceleration in the pace of economic growth in the past few months, following the strong growth rate in the first quarter,” he said. Mr. Trichet said that while he expected moderate growth to continue, “uncertainty is particularly high.”
That assessment suggests the E.C.B. may wait to raise its benchmark rate again. The central bank has raised its main rate in two steps since April, from 1 percent to the current 1.5 percent, in an attempt to head off rising inflation.
Analysts expect the E.C.B. to raise rates for the 17-nation euro area again at the end of this year or early next year, after Mr. Trichet retires at the end of October and hands the presidency to Mario Draghi, governor of the bank of Italy.
Similarly, the Bank of England left its benchmark rate unchanged because the country’s economy remains weak. The Bank of England also kept its bond purchasing program — which injects money into the economy to spur growth — at £200 billion, or $326 billion.
The British economy grew 0.2 percent in the second quarter from the first quarter, when its G.D.P. rose 0.5 percent. The manufacturing sector shrank in July, an unexpected development that also pointed to a weak economy.
One factor weighing on the British economy has been the sovereign debt crisis, since the euro zone is the country’s biggest export market.
“It’s not a spectacular recovery,” said Michael Taylor, an economist at Lombard Street Research in London. “It’s choppy and it’s disappointing and that does argue for an unchanged policy well into next year.”
A far-reaching government austerity program that froze public sector pay and pensions and increased some taxes is another factor holding back growth. At the same time, consumer price inflation remains well above the Bank of England’s 2 percent target — conditions that would normally lead the bank to raise interest rates.
Prime Minister David Cameron warned last month that the economic recovery would be difficult. So far his government is sticking to the deepest budget-cutting program since World War II despite mounting criticism from members of the opposition, who argue it is too punishing.
There is also growing pressure on the British government and the central bank to consider other measures to fuel economic growth. The National Institute for Economic and Social Research, which supplies information to the Bank of England and other clients, said on Wednesday that cutting taxes would be one way to help the economic recovery.
British businesses continue to feel the impact of the weak economy. Holidays 4U, a travel service, ran out of money on Wednesday, leaving hundreds of passengers stranded. The fashion retailer Jane Norman and the wine retailer Oddbins went into administration earlier this year. Many stores have started to discount merchandise early to lure wary consumers, whose disposable incomes have been reduced by inflation.
Julia Werdigier reported from London.
Article source: http://feeds.nytimes.com/click.phdo?i=3abf6d4cdc9031951a68b9185db878cb
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