Trichet: Threats to Euro Region Have Worsened

European Central Bank President Jean-Claude Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis worsen.

The economy faces “particularly high uncertainty and intensified downside risks,” Trichet said at a press conference in Frankfurt today after the ECB left its benchmark rate at 1.5 percent. While monetary policy is still “accommodative,” financing conditions have worsened in parts of the euro region and the ECB stands ready to pump more cash into markets should that be required, he said.

The yield on German 10-year bunds fell to a record as some investors speculate the ECB could cut interest rates or open up more emergency credit lines for banks. The spreading debt crisis is sapping confidence in Europe’s financial institutions, driving up market borrowing costs and forced the ECB to widen its bond purchase program to Italy and Spain.

The ECB also cut its growth forecasts for this year and next and abandoned its warning about looming inflation threats.

“The situation has deteriorated so much that they should throw the kitchen sink at it,” said Julian Callow, chief European economist at Barclays Capital in London. The ECB could cut rates, offer banks unlimited liquidity for up at a year or deploy a combination of those measures, he said. Today’s comments “went further in a ‘dovish’ direction that we had expected.”

Spreading Crisis

Since the July rate increase, the debt crisis has spread to Italy and Spain, the region’s third and fourth-largest economies. Fears of a renewed global recession also caused stocks to tumble around the world and forced Japan and Switzerland to intervene to stop their currencies appreciating as investors seek havens.

Other central banks are refocusing on supporting growth. Yesterday the Bank of Canada said there is a “diminished” need for it to raise interest rates, Sweden’s Riksbank abandoned a planned increase and the Reserve Bank of Australia signaled it is prepared to keep rates on hold.

Bank of England

The Bank of England will be forced to add stimulus within months, Citigroup Inc. and Goldman Sachs Group Inc. say. The U.K. central bank today kept its key rate at a record low of 0.5 percent and left its bond-purchase program at 200 million pounds ($320 billion).

With Deutsche Bank AG Chief Executive Officer Josef Ackermann saying conditions are reminiscent of those at the depths of the global credit crisis in 2008, Trichet signaled the ECB is prepared to deploy more measures to help cash-strapped banks.

“We stand ready to provide liquidity as we have done in the past, taking into account the need for the banking sector,” he said.

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