The European Central Bank on Thursday disappointed markets hoping for dramatic action to tackle the eurozone debt crisis that claimed Ireland as its most recent victim and now threatens Spain.
The ECB left its key interest rate at a record low of 1.0 per cent but said it would extend cheap emergency funding for the commercial banks through the first quarter of 2011.
Crucially, the ECB said it would also continue to buy government bonds to help ease pressure on a growing list of eurozone countries – Belgium, Greece, Ireland, Italy, Portugal and Spain – but gave no indication it would increase its purchases, as the markets had hoped.
“The ECB chose a compromise,” ING senior economist Carsten Brzeski noted, a view echoed by many other analysts.
The central bank also released new growth forecasts that included an upward revision to 1.7 per cent for 2010, but it warned: “The risks to this economic outlook are tilted to the
downside, with uncertainty remaining elevated.”
The 16-nation eurozone economy was forecast to grow around 1.4 per cent in 2011 and 1.7 per cent in 2012. Inflation estimates came in at 1.6 per cent for 2010, 1.8 per cent for 2011 and 1.5 per cent for 2012.
Investors had sought signs from ECB head Jean-Claude Trichet that the bank was ready to take fresh measures to tame a debt crisis now threatening Spain after engulfing Greece and Ireland.
“There is a risk of a full-blown crisis whereby contagion affects all peripheral countries and possibly moves to some core countries,” said Marie Diron, senior economist at Ernst & Young.