Jean-Claude Trichet, fronting his last interest rate meeting as President of the ECB, said: "The economic outlook remains subject to particularly high uncertainty and intensified downside risks".
His view of the eurozone economy was more gloomy than last month when he merely talked of downside risks, encouraging some investors to believe a rate cut is not far away.
Mr Trichet said the ECB saw "intensified" threats to the eurozone economy and focused on measures to keep the financial system working properly.
To help banks withstand a further worsening of the European sovereign debt crisis and growing tension in the interbank market, the ECB renewed offers to lend banks one-year funding in two operations, this month and in December.
Extra-long 12-month liquidity tenders were first introduced in June 2009 and the first such offer attracted record-breaking use of €442bn.
Mr Trichet also said the bank would buy up to €40bn in covered bonds - bonds backed by assets such as mortgages and public sector loans that are perceived as safe and high-quality assets. The ECB's presence should help free up that credit market and make borrowing easier for banks.
It will also keep offering unlimited amounts of credit at its shorter-term lending operations of up to 3 months through the first half of next year.
Many European banks are exposed to losses on Greek debt. That has made borrowing between banks, which is crucial for their daily functioning, increasingly difficult because of fears the money might not be repaid.
However, Mr Trichet continued to draw the line at other crisis-fighting proposals including the idea of turning the European Financial Stability Facility (EFSF) bailout fund into a bank that can tap the ECB for funds.
"The Governing Council does not consider it would be appropriate that the central bank would leverage the EFSF," he said.
The ECB has raised rates twice this year and may have been swayed from going into reverse immediately by inflation hitting 3pc last month, well above its target of close to but below 2pc.
"Inflation has remained elevated ... and is likely to stay above 2pc in the months ahead but to decline thereafter," Mr Trichet said.
Holger Schmieding, economist at Berenberg Bank, said: "The ECB is now likely to prepare an interest rate cut within the next four months, by March at the latest."
by The Telegraph Oct 6, 2011
European Central Bank offers banks new emergency loans to ease credit crunch as it hold interest rates - Telegraph
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