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Thursday, May 7, 2009

ECB Cuts Rate, To Start Assets Purchase: Trichet

The ECB lowered its key refi rate by a quarter percentage point to 1 percent but kept the overnight deposit rate, which is acting as a floor for money markets, at 0.25 percent, narrowing the gap between its policy rates instead of cutting the lowest of these to zero.

"The Euro System ... will purchase euro denominated covered bonds," Trichet told a news conference after its monetary policy decision.

"We expect to engage in a program which would be around 60 billion euros ($79.8 billion)," he said.

"In recognition of the central role played by the banking system in financing the euro area economy we will conduct liquidity providing longer term refinancing operations with a maturity of 12 months. The operations will be conducted at fixed rate tender procedures with full allotment," Trichet added.

He said the current interest rates of the ECB were appropriate.

The euro fell briefly against the dollar after his remarks but rebounded sharply after Trichet said an exit strategy from the policy of buying assets was needed.

Covered bonds — debt instruments secured by a cover pool of mortgage loans or public-sector debt — were considered as one segment of private securities that has been particularly touched by the financial turbulence, and needed boosting, he said.

"Around 60 billion euros is only an order of magnitude, it looks like an appropriate level for what we try to do, help revive this segment," Trichet said, but added: "sterilization, an exit strategy are absolutely essential in our view."

"These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help to improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises," he said.

"We will display in our communication of our next meeting all the technicalities that goes with this purchase of covered bonds, which is something that is highly technical."

The decision to purchase assets does not necessarily mean the interest rate has found a floor, he said.

"We have not decided today that the new level of our policy rates was the lowest level, that we could never cross whatever future circumstances would be," Trichet said.

The ECB has cut rates from 4.25 percent since last October. Trichet said the euro zone was showing tentative signs of stabilising at a very low level after a weaker than expected first quarter.

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