Central Banks in Europe Move to Support Economy

Both central banks left their key benchmark rates unchanged, at 1.5 percent for the euro area covered by the E.C.B., and 0.5 percent for Britain.

Some analysts had seen a rate cut as a possibility for the euro zone amid growing concern that Europe could again dip into recession. But the E.C.B. has remained steadfastly focused on inflation, which rose again in September.

It did respond, however, to signs that some big banks that are having trouble raising funds at reasonable rates, because other lenders doubt their creditworthiness due to their exposure to shaky government debt.

The E.C.B. said it would resume offering banks unlimited loans at the benchmark interest rate for about one year. Previously the maximum term was six months. Banks must put up collateral such as bonds or other securities, but otherwise are allowed to borrow as much as they want.

To help avert a credit crunch, the E.C.B. also said it would resume buying so-called covered bonds, which are a form of debt secured by packages of loans and guaranteed by the issuing bank. Covered bonds are one of the main ways that banks raise money. The E.C.B. also bought covered bonds in 2009 to alleviate the bank funding crunch that followed the collapse of Lehman Brothers in 2008.

At a news conference, the E.C.B. president Jean-Claude Trichet said the bank expects “very moderate” growth in coming months in “an environment of particularly high uncertainty.”

Hours earlier, the Bank of England said it would widen its so-called quantitative easing program to £275 billion, or $425 billion, from £200 billion.

“Tension in the world economy threatens the U.K. recovery,” the bank governor Mervyn King wrote in a letter to the British Treasury explaining the bank’s decision.

“Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally,” Mr. King wrote. The euro area is Britain’s biggest export market and demand from the region is vital for an economic recovery.

The British move came about a month earlier than some economists had expected but was no surprise. The Bank of England’s rate-setting committee had hinted last month that it might have to inject more money into the market to support an increasingly threatened economic recovery.

The decision shows that “they believe an already difficult outlook for the economy has deteriorated,” Howard Archer, chief economist for Britain at IHS Global Insight, said.

The pound fell against all major currencies after the announcement. The euro also fell.

Many economists have argued that the E.C.B. erred when it raised rates twice this year, most recently in July. Evidence is growing that the euro area economy is headed for a downturn caused by severe austerity programs in countries like Spain as well as the uncertainty created by the European government debt crisis.

But recent figures showed inflation in the euro area rose to an estimated 3 percent in September, well above the E.C.B. target of about 2 percent. Hard liners on the governing council are likely to have argued that the E.C.B. would violate its mandate to preserve price stability if it cut rates now.

In addition, some members of the governing council, which includes chiefs of national central banks, may have argued that a rate cut just three months after the last increase would be an embarrassing reversal that could damage E.C.B. credibility.

Still, Mr. Trichet could use his last news conference before handing the presidency of the central bank to Mario Draghi, governor of the Bank of Italy, to signal a rate cut in the coming months.

With Greece on the brink of default and problems at banks such as Dexia, a French-Belgian institution, signaling severe strain in the European banking system, European institutions are under pressure to do something to relieve the tension.

José Manuel Barroso, president of the European Commission, the executive of the European Union, said he was advocating a coordinated approach to bank recapitalization across the euro zone.

“It’s not only obvious but indispensable,” he said in Brussels. “I don’t think anyone in Europe is opposed to coordination in such a sensitive area.”

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