The pace of growth in Eurozone is likely to be hurt by financial market turmoil and funding strains in the second half of this year, European Central Bank President Jean-Claude Trichet said Thursday.
Speaking at the regular post-meeting press conference, his last as ECB chief, Trichet said, "The economic outlook remains subject to particularly high uncertainty and intensified downside risks."
"At the same time, short-term interest rates remain low."
Euro area real GDP growth is likely to be 'very moderate' in the second half of this year, the central bank chief said. The risks to the economic outlook for the euro area remain on the downside in an environment of particularly high uncertainty, he added.
Inflation is elevated and the ECB expects it to stay clearly above 2 percent in coming months, but may decline thereafter. The bank sees the risks to the medium-term outlook for price developments as broadly balanced.
Trichet also said the Governing Council did discuss the pros and cons of an interest rate cut. However, it was decided on a consensus to maintain rates today, he added.
As widely expected, Trichet announced that the ECB would start its covered bond purchases again. The Governing Council decided to launch a new covered bond purchase programme (CBPP2) for an intended amount of EUR 40 billion.
The central bank said these purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases. The bank will start buying covered bonds in November 2011 and the programme is expected to be fully implemented by the end of October 2012.
Covered bonds are issued by banks and secured by mortgages. The central bank's previous covered bond purchase programme, started in 2009, ended on June 30, 2010 when it reached a nominal amount of EUR 60 billion.
Trichet also announced that the central bank would reintroduce its one-year loans to financial institutions. The ECB would conduct two longer-term refinancing operations (LTROs), one with a maturity of approximately 12 months in October and the other with a maturity of approximately 13 months in December.
Both operations would be conducted as fixed rate tenders with full allotment and interest would be paid on maturity. These operations are in addition to the bank's regular and special-term refinancing operations. Such 12-month loans were last offered in late 2009 as interbank liquidity dried up amid the global financial crisis.
Further, the ECB said it will continue ts main refinancing operations (MROs), aimed at providing unlimited liquidity to banks, as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the sixth maintenance period of 2012 on July 10, 2012.
Additionally, the Governing Council of the ECB decided to conduct three-month LTROs. These will be alloted on January 25, February 29, March 28, April 25, May 30 and June 27 of 2012 as fixed rate tenders with full allotment.
"The provision of liquidity and the allotment modes for refinancing operations will continue to ensure that euro area banks are not constrained on the liquidity side," Trichet said.
As concerns over the spillover effect of the debt crisis increase, Trichet said the situation of the banking sector calls for particular attention. The ECB urged banks to do all that is needed to reinforce their balance sheets, to retain earnings, to ensure moderation in remuneration, and to turn to the market to strengthen further their capital bases.
The message is strong, Trichet said and called on banks to take full advantage of government support measures, which should be made totally operational. He also mentioned the possibility in future for the European Financial Stability Facility (EFSF) to lend to governments in order to recapitalize banks.
The ECB also governments need to take decisive and frontloaded action to bolster public confidence in the sustainability of government finances amid high financial market uncertainty. Eurozone governments need to stand ready to take any additional measures that may become necessary owing to the evolution of their situation, Trichet said.
He also asked governments to decisively and swiftly implement substantial and comprehensive structural reforms. Responding to questions, Trichet reiterated his stance that central banks cannot substitute governments. He also said it was not appropriate for the central bank to leverage the EFSF.
Regarding bank capitalization, Trichet said ECB had not devised any specific amount. He said such figures were not important, but banks must do all what is necessary.
Apparently, ECB's decision in August to resume government bond purchases had prompted the central bank's chief economist, and a German, Juergen Stark to resign. Today, Trichet said he has full respect for Stark. "Juergen Stark is devoted to Europe," he added.
Turning to bailed out nations, Trichet said Ireland has done a good job and is visibly improving every month.
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June 19, 2026 16:46 ET Major central banks continued to dominate the economic news flow this week too, led by the Federal Reserve, as they announced their latest policy decisions. The Federal Reserve policy session was in focus as it was the first to be led by the new chief Kevin Warsh. In Europe, central banks of the U.K. and Switzerland announced their rate decisions. In Asia, the Bank of Japan drew attention for its policy moves, while data out of China threw some light on the state of the economy.