The European Central Bank Chief, Jean Claude Trichet, mentioned in his post- interest rate announcement speech that the ECB will continue buying government bonds in response to a deepening debt crisis and will continue offering a new round of liquidity to banks.
This was much needed news since recently, Italian bond yields have soared to 14 year highs, alarming markets that debt contagion could spread outside the peripheral euro zone economies to larger countries like Italy. E.U. bank exposure to Italian debt was much larger than Greece, Ireland and Portugal.
Trichet also said commercial banks would be able to access as much liquidity as they needed from the ECB until at least the end of the year, and announced a new ECB offer to the banks of six-month money.
Trichet also signalled that interest rates could rise further, despite a “renewal” of the euro zone crisis. This contrasts Switzerland’s and Japan’s decision to cut rates this week.
In periods of financial stability Trichet’s comments would make markets react significantly, even causing the euro to rise. However, during a debt crisis, tighter monetary policy would be hurtful to struggling economies.