the ECB

But mostly because, after the mini-inflation scare following the ECB's bailout plans for Europe, we seem to be having a deflation scare.

He said the ECB was a "young, powerful but increasingly arrogant institution" .

Any "pre-commitment" on interest rates might undermine the influence of the ECB, Mr Trichet warned in a speech in London.

Giving consideration to private or public debt sustainability, at the cost of price stability, would be a violation of the ECB's mandate.

To break out of this vicious cycle, the ECB will have to cut interest rates, and return to a policy of unlimited long-term funding.

But Mr Trichet said the ECB would not revise its economic forecast of a 1 per cent rise in eurozone gross domestic product this year.

At least until July, the ECB will continue to provide unlimited loans for periods of up to three months.

"The ECB could well end up getting much of the blame for the sharp economic slowdown, which is now in the pipeline, " he said.

A euro zone central bank source told Reuters last week that the ECB would like to see its resources at least doubled.

When credit markets seized up in the fall, the ECB began offering banks unlimited loans at its policy rate for up to six months.

In Europe, the ECB is still likely to raise interest rates again, while the Bank of England looks as though it will now wait and see.

Before that, banks bid for funds in auctions; the ECB capped how much it doled out, giving more to banks that bid at higher rates.

He said the move opened the door wide for similar easing in the ECB's main policy rate next Thursday.

Conservative central bankers worry that it would still break the rule that bans direct purchases by the ECB, in spirit at least.

The ECB will say next Thursday how much of its crisis support --mostly ultra-easy loans for banks-- will remain in place beyond mid-January.

Less than an hour after the Bank of England's decision, the ECB reduced its main rate by three-quarters of a percentage point, to 2. 5%.

One of the main reasons for the strength of the European currencies this year is anticipation of a tightening of monetary policy by the ECB.

But to unleash the ECB or to embrace eurobonds could precipitate a domestic crisis that would be almost as catastrophic.

Trichet said the ECB had cut rates as it was "anticipating future bad news that we expect coming from the real economy. "

The German central bank's president, Jens Weidmann, is one of the strongest opponents of such measures on the ECB's governing council.

Athens would need to have an alternative currency and a strong candidate for central bank governor lined up with a hotline to the ECB.

There was no sign of a shift from the German chancellor either on a more ambitious mission for the ECB in addressing the crisis.

In a speech in Berlin, Weber said the ECB should be ready to tighten credit costs again once the financial sector was back on its feet.

Mario Draghi, the president of the ECB, has officially ruled out a vast expansion of its bond-buying programme.

The ECB president indicated the ECB was prepared to cut eurozone official interest rates if the economic outlook continued to deteriorate.

It would be a nonsense if the ECB's dogged defence of monetary rigour led, say, to an Italian default and a global depression.

So far, the ECB and European politicians have done just enough to keep the pot simmering without rolling into full boil.

The ECB and the Bank of England do all three of these things. So far the Fed has got along without them.

Traders took solace in the hawkish demeanor of the ECB seemingly forgetting how they were let down by the bank at the last meeting.

The first is to stay more or less where we are, expanding the ECB's bond-purchasing program and simply trying to hang in there.

This explains why the ECB's commitment to an exit did not wane as investors' unease spread from Greece to elsewhere in Europe.

Given the urgency of the crisis, therefore, it may be necessary to turn to the ECB for assistance.

Although markets had largely priced in a quarter-point rise by the ECB, the Bank of England move wrong-footed markets.

From this perspective, money does not deserve to be central to one of the two "pillars" of the ECB's monetary policy strategy.

At least some on the ECB's 23-strong governing council would agree the bank could be more aggressive.

"Neither the ECB nor the EFSF (European financial stabilization facility) would buy any more bonds in the market, " he said.

We welcome the actions taken by the ECB and the national central banks since the beginning of the turmoil.

Just as the ECB bought time for European banks, rescues have been attempted for the struggling governments of Greece and Ireland.

He also refused to rule out the possibility of eurozone governments issuing joint bonds, although the ECB was not endorsing such a step.

Financial markets, however, see the ECB increasingly as the only institution with pockets deep enough to ease the crisis.

Second, it may be impossible to obtain such consent, particularly if funding relied heavily on the ECB, at least in the short run.

and, whatever clout the ECB has gained from the crisis, it would be dangerous for its legitimacy to let it embark on mission creep.

Some traders were disappointed that the ECB had not embarked on US-style "quantitative easing" .

Trichet said the ECB expected banks to make their contribution to dealing with the turmoil in financial markets.

Looking ahead, the peacefulness should end in London with a slew of top tier data that will be capped off by the ECB statement at 12: 45GMT.

The ECB would be ill advised to go that far without a political agreement on how the eurozone should work.

While the ECB does not target economic growth, it cannot ignore such a rapid deterioration either, as it poses price stability risks.

Money markets remain at the heart of the ECB's efforts to fight off the financial crisis.

But an article in the bank's latest Monthly Bulletin shows that it is the housing market that the ECB is watching most keenly.

The ECB's move is therefore being seen as a sort of bridge loan to allow time for the member countries to pass the necessary changes.

Subordinating monetary policy to exchange rate policy would be painful for institutions like the ECB.

With the ECB determined to tell investors that sovereign debt can default, they have created a perfect recipe for a self-imposed disaster.

Jean-Claude Trichet, the ECB president, denied that the eurozone's 16 governments had bounced the bank into the bond purchase programme.

"Some of the foreign central banks, led by the ECB, have been more hawkish than they needed to be, " King said.

The risk, however, is of the ECB's credibility being questioned if it lacks German support for its actions.

If the ECB were to take the lead among the large central banks, the euro could rise to intolerable levels.

Although the ECB and the Bank of England have sounded sanguine about tightening credit, central bankers are not entirely unperturbed.

Once we see that the ECB can effectively support the euro's value, then it does not matter whether this government or that defaults.

The agreement of the bank's policy-making governing council is a watershed moment for the ECB.

It is as if the ECB were setting its monetary policy to meet the conditions of Spain alone.

Mr. Frieden said the bailout fund would have to act 'together with' the IMF and the ECB.

The rate increase put the ECB still further ahead of the game among the central banks of the largest advanced economies.

Soros said the ECB could then encourage countries to finance themselves with Treasury bills bought by banks.

The ECB's monetary tightening was all the more uncalled for as countries on the periphery had to undertake fierce austerity programmes.

The ECB now seems ready to massively raise its programme of debt monetization.

French Budget Minister Valerie Pecresse challenged the view that the ECB has no mandate other than to keep inflation low.

And were the ECB ready to provide unlimited liquidity to solvent states, as it does for banks, it might not have to buy so many dodgy bonds.

The least bad option would be for the ECB to ensure liquidity for solvent governments and financial institutions, without limit.

This was how the ECB's monetary policy produced a more or less adequate rate of expansion of overall eurozone demand.

Now, the ECB bank must decide if it needs to stray even farther from its core mission in to save the euro.

As I've said many times, it's a shame that the ECB's attempt to create rules for financial stability has been the undoing of the euro.

As you know, the ECB keeps refusing to save the world by printing money.

Both the Bank of Canada and the ECB are considering outright purchases of government or corporate debt to boost the quantity of credit.

Yields on Greek, Portuguese, and Italian bonds show that the ECB will not change market sentiment if it pulls its punches.

The ECB and others should stand ready to defend Belgium, Italy and Spain if need be.

Italy is not in danger of default and can turn itself around and the ECB's independence must be preserved at all costs.

The Bank joined the Federal Reserve, the Bank of Japan, the ECB, the Bank of Canada and the Swiss National Bank in making the announcement.

It would make no sense for the ECB to put its own reputation for orthodoxy before the ravages of deflation.

The situation is somewhat analogous to a bank run on the sovereign bonds of these countries, with the ECB acting as the FDIC.

It does suggest, however, that this will not work unless the ECB also starts cutting rates.

The ECB insists that this participation must be "voluntary" so that no technical default occurs.

Mr Draghi's comments, however, for the first time indicate that the ECB is willing to intervene more aggressively than it has done so far.

The most probable compromise, EU diplomats said, would be to have another member of the ECB's governing board direct the council.

Asked if the ECB was prepared to react flexibly to soaring financial market tensions, he responded: "Yes, sir. "

I think that the ECB has done all it could to be up to its responsibilities in exceptional circumstances . . .

Another danger is a disagreement between Greece and its trio of rescuers (the EU, the IMF and the ECB) over the conditions of its bail-out.

The euro "can only be credible now if the ECB makes a statement that it stands unequivocally behind Italian banks, " Mr Portes said.

The ECB said on Thursday that it had encouraged Portugal to seek financial aid.

Mario Draghi, the ECB's new president, has hinted that were a fiscal pact to be agreed, the ECB might buy bonds on a larger scale.

The ECB has brought overnight interest rates back in line with its main policy rates.

The same may be true in the euro zone too, but the ECB is not yet ready to make that leap of faith.

But if the ECB were to embark on unlimited bond buying, the sums involved would be too vast to withdraw.

Some have said the ECB's one-year LTROs helped exacerbate the link between eurozone sovereigns and their banking systems.

A quicker, more powerful alternative would be for the ECB to stand behind solvent sovereigns with unconditional and unlimited liquidity.

Well, the French president's attitude to Italy was coloured by his understandable annoyance about the allocation of seats at the ECB.

They were one of the few countries last week that voted against the ECB entering the secondary markets.

"It's as if the ECB has sinned and has to do penance, " says Julian Callow at Barclays Capital.

The ECB could "diminish rates without adding to inflationary risks in the medium term" , he said.

Precisely because he is Italian, Mr Draghi may have to be even stricter in insisting on a narrow interpretation of the ECB's mandate.

The last time the ECB's deposit facility was so flush was more than five months ago, on Feb. 7, when banks stashed 137 billion euros there.

The ECB and the Bank of England do all three of these things.

Draghi expressed strong resistance to the ECB being used as a lender of last resort, insisting that it was not its remit.

In exchange for a guarantee, the major banks would have to agree to abide by the instructions of the ECB.

Governments in Athens, Dublin or Madrid may be cheering that they won't have to deal with Mr. Weber at the helm of the ECB.

Despite the deteriorating growth outlook, Trichet said that the ECB was more concerned about the risk of inflation.

If it is, then the EFSF or even the ECB may buy as many bonds as it takes to stabilise market interest rates.

In the short term, it must be enough to free the ECB to intervene without limit, by assuaging fears of moral hazard.

The ECB is not allowed to fund member governments, but it or national central banks could lend to the IMF.

The ECB is the only institution in Europe that has sufficient resources to guarantee European sovereigns.

Furthermore, they were supervised by their national central banks and by the ECB, which "seemingly raised no objection to this lending" .

On a purely technical level, it does not really matter whether you create a eurobond, or whether the ECB buys all the debt.

Banks could rediscount the bills with the ECB but they would not do so as long as they earned more on the bills than on the cash.

The ECB expects growth to continue at a moderate but uneven pace, he said.

Interest rates should be cut to bottom levels and the ECB should pledge to keep them low for quite a while.

Some economists said it was a sign that the hardliners were in retreat and the ECB was becoming more dovish.

The ECB was "strongly concerned" about such "second-round" effects, he said.

However, the board of the ECB is an independent authority whose independence has to be respected even by the Bundesbank.

Mr Trichet is quite wrong to claim that the rise in interest rates has nothing to do with the ECB's monetary stance.

Many influential Germans think the ECB has reneged on the "no bail-out" pledge at the heart of monetary union.

But Mr Weber could not stomach some of the measures the ECB was taking in response to the euro crisis and bowed out of the race.

The fund will not be capable of acting quickly even if its resources are expanded by giving it access to the ECB's liquidity.

Jean-Claude Trichet, the head of the ECB, is effectively gambling with the eurozone's future by taking on this huge commitment.

However, the devil is always in the details and such measures by the ECB could come with severe consequences.

Contrary to what various Germans in the ECB's governing council may have been saying, we are not in this situation yet.

Some on the ECB's council might have hoped soon to make the terms more restrictive, but that now seems unlikely.

The Fund could then take over the work of the ECB, whose courageous buying of indebted countries' bonds requires adequate fiscal policies.

In Germany, whose conservative Bundesbank was the model for the ECB, fears are growing that its expanded role will blur its priorities.

"The solution has to be a euro devaluation through the ECB purchasing peripheral euro zone government bonds, " said Tullett's Komileva.

The ECB could credibly stand ready to buy debt of a country like Italy.

Whereas the "traffic light" approach proposed by the ECB may help structure the policy discussion, a mechanical approach would be wrong.

The only reasonable objection to a lender of last resort role for the ECB is moral hazard.

The issue has gained importance as the ECB has taken on a more political role as guardian of the embattled single currency.

In exchange for a guarantee, the eurozone's major banks would have to agree to abide by the ECB's instructions.

The only institution able to perform this role is the ECB.

The Spanish government this week pleaded for the ECB to be aware of the liquidity needs of its financial system.

From a UK perspective , that would be far better than using the ECB , which may volunteer its services .

The ECB's auction may make a credit crunch less severe, but it is not enough to avoid one.

So far, the ECB has argued that it has the instruments in place to provide euro liquidity.

"The ECB hiking [interest rates] in July would be consistent with a stagflationary feel, " said Michael Hume at Lehman Brothers.

He stressed that the ECB abides by the 'spirit' of its founding charter that prohibits the central bank from financing governments.

The ECB could no longer accept their collateral, Greek debt, which would immediately have less than junk status.

But if events keep playing out just as they did seven years ago, the ECB will be forced into lowering rates later this year.

More niggling is the suspicion that the ECB has caved in to political pressure to help out spendthrift governments.

The pressure on the ECB to go down to zero per cent will become immense just for that single reason.

Earlier Thursday, the ECB dashed investor hopes it would signal strong action to shore up the euro zone's ailing bond markets.

The ECB meeting on Thursday will also garner plenty of attention especially as the ECB is likely to shift its tone from hawkish to neutral.

Therefore, if the eurozone periphery is to be saved, investors need to believe in the ECB and its leadership.

Moreover within the euro zone, crisis response is crippled by the ECB's constitutional ban on bailing out its own banks.

A spokeswoman for the ECB declined to comment on who uses the bills. The ECB and its member governments are beneficiaries of the demand.

Much will depend on bank "stress tests" , with which the ECB has assisted, results of which are scheduled for publication this month.

Yet again, disaster will loom. And yet again, the ECB will end up staving it off.

"With this fine-tuning operation, the ECB is further supporting the normalisation of conditions in the money market. "

The responsibilities of the ECB, national financial and regulatory authorities and EU officials can be defined in different ways.

The ECB, she said, was responsible for monetary policy alone.

It would have enough money to do that without borrowing from the ECB, but not if it uses up lots of ammunition recapitalising banks.

The ECB holds at least 20 per cent of the Greek, Portuguese and Irish debt, yet yields remain painfully high.

If Europe wanted to adopt one, the ECB and finance ministers would have to agree on such a policy jointly. This is highly improbable.

The ECB initially performed this role in a timid way, while making it clear that it was unwilling to continue doing so.

In its monthly bulletin on Thursday, the ECB warned of the dangers of such steps, saying they put financial stability in jeopardy.

The beauty of this outcome would be that the ECB would not have to buy government bonds any more.

Yet the ECB has permitted nominal GDP and the money supply (supposedly, the "second pillar" of its policies) to stagnate.

At the height of the financial crisis, the ECB lowered interest rates aggressively in the face of downside risks to price stability.

That the ECB has not purchased government bonds is in line with this institutional framework.

Both the Bank of England and the ECB cut rates last month by a half-point.

When the ECB restarted the programme in August, it made clear it was a stopgap until the EFSF assumed responsibility.

The ECB, despite its misgivings, is the only institution with the power to reverse a self-fulfilling panic.

The Bank of England has been conducting a much more aggressive monetary policy than the ECB.

This is an issue which must be dealt with economically as the ECB's monetary policy is drafted with the overall needs of the euro zone.

Jean-Claude Trichet, the ECB's chief, has warned that the effect of dear oil on potential growth "should not be considered negligible" .

He said last month the ECB was in "strong vigilance" , which was virtually a promise of a rate rise this month.

Until the bailout fund gets new powers, the ECB remains the only institution with the firepower to prevent contagion.

The ECB's commitment to tightening, however, will to a certain extend depend on the robustness of the euro zone economy.

Particularly disappointing is the ECB's decision not to lower the rate paid on funds deposited with the central bank.

But the message kept the euro from leaping against the dollar, and eased some of the public pressure on the ECB.

Some analysts also expect the ECB to keep its three-month liquidity operations unlimited to help banks struggling for cash.

When Spain and Ireland adopted the euro, they imported low interest rates from Germany: the ECB was the Bundesbank writ large.

But the collapse of Dexia in October after it ran out of cash suggests that the ECB may not provide unlimited liquidity.

She also stressed the difference in policy direction between the ECB and its U. S. counterpart the Federal Reserve.

Mr Draghi, the ECB president, called for a "fiscal compact" between eurozone governments to restore investor confidence in the region.

So when Italian and Spanish bond yields jumped up again (see chart right) there was only one institution with the capacity to act: the ECB.

The Fed's assets are likely soon to exceed the ECB's, as the reach of its operations extends far beyond liquidity support for banks.

The ECB could also take a more aggressive approach to buying government debt as a way to drive down borrowing costs.

That the ECB has been pushed so far is because seemingly small financial tremors can quickly turn into earthquakes.

The ECB is speculated to increase rates in May to control rising inflation levels out of the total of 0. 5% rate hikes for 2011.

But because Europe's periphery is facing a crisis of solvency rather than just liquidity, the ECB would be left carrying the losses.

"If I were the Chinese central bank I would be saying: what is the ECB doing? Why can't they do it? " Mr Booth said.

Annual inflation rates should return to the ECB's preferred level of just under 2% in the medium term, he said.

The ECB must recognise too that for citizens of many countries, a deal without shared sacrifice by the private sector is unacceptable.

Mr Trichet's departure will create a space for a French appointee, perhaps as chief economist, to the ECB's six-strong executive board.

"I think Geithner can provide further political weight to a more aggressive stance by the ECB, " Lombardi said.

When investors stopped buying Italian debt this summer, the ECB stepped in and bought Italian bonds on the secondary markets.

The ECB did not provide any more details about its programme to buy eurozone government bonds.

The ECB, like the U. S. Federal Reserve, are doing what they can via rates and liquidity to support growth and financial markets.

Within the ECB, opponents of further action argue that the moves have already put the central bank's reputation at risk.

This will add to the war chest of the hawkish faction at the ECB, who are reluctant to cut rates so soon after raising them.

In other words, by doing nothing, the ECB will effectively raise interest rates by almost three notches of a quarter point each.

For the ECB to stand behind less prudent countries may be unwelcome to Germans; but letting the euro fall to bits is much, much worse.

National regulatory authorities, including in Germany, have been sceptical about ceding supervisory powers to the ECB.

The move forms part of the ECB's plan gradually to withdraw the emergency measures it introduced during the financial crisis.

As mentioned earlier, all eyes will be focused on the upcoming rate decisions out of the ECB and the UK's MPC later in the day.

The ECB, keen to uphold a rigorous monetary reputation, has built up respect and acumen in the councils of monetary power around the world.

The ECB sees a bumpy road ahead for the euro zone and is wary about global prospects , especially if the US rebound disappoints .

Also Monday, the euro-zone ministers nominated Portuguese central-bank Governor Vitor Constancio to be vice president of the ECB.

Many objections are raised against the idea that the ECB should act as a lender of last resort in government bond markets.

The ECB insisted the move won't affect the total amount of credit it provides to the euro zone.

The deal allowed the ECB to press ahead with its bond-buying plan, and the package of EU measures has helped quell the panic.

Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks.

As a last resort, the ECB council, which prides itself on its political independence, could simply ignore Berlin.

Jean-Claude Trichet, the ECB's president, cited vigorous money growth after the bank raised its base rate to 4% on June 6th.

Any effort by the ECB to be the lender of last resort that members need will start a firestorm of protest.

Mr Sims says the ECB needs to be reassured its own balance-sheet has sound fiscal backing.

Jean-Claude Trichet hit some valedictory notes defending the ECB's record on inflation and its handling of the crisis.

Allies of the ECB's boss, Jean-Claude Trichet, insist he was reacting to market pressures, not assaults on his independence.

But it may be that he has more sympathy for the ECB's bond-buying policy than his predecessors, as does today's opposition SPD.

It sent a message to the markets that the ECB would buy some Italian bonds on the open market, but only a limited amount.

The ECB frets that households may be borrowing too much to buy homes; if house prices fall in future, the zone's economies could be hurt.

The ECB said it would ensure essential central banking activities were maintained during the protest action.

But the decisions that matter most, and about which Mr Trichet would say the least, are those on the ECB's purchases of sovereign bonds.

It demands a willingness on the part of the ECB to accept that saving the euro is more important than sticking to its inflation remit.

But the fact that the ECB and euro-zone governments have options does not mean that they will take them.

The ECB could turn the SMP into a macroeconomic stability programme.

The ECB has been among the global financial institutions most vocal in warning about possible risks created by hedge funds.

As long as they yield more than deposits with the ECB, the banks would find it advantageous to hold them.

For Italy or Spain, borrowing from the IMF is not the same as the ECB buying their bonds.

The pressure to tighten fiscal policy in some parts of the euro area will make it hard for the ECB even to consider raising interest rates.

But with the ECB meeting, interest-rate differentials will be a key focus and investors, will "forget about debt problems, " Sylvester said.

The ECB president also suggested gloom about the US economic outlook might be overdone.

France has already given up on its demand to leverage the EFSF through the ECB due to German and ECB resistance.

And the ECB, like any human institution, responds to the political perspective and personal ambitions of its leadership.

It really revolves around investors concerned about whether the ECB will act as the true lender of last resort.

For European banks, a standby facility like this should come from the ECB.

With the ECB unwilling to help, Europe's policymakers are scrambling for other ways to build the firewall.

Unlike monetary debt financing, there is no legal shadow over the ECB's authority to make monetary policy work.

It is true the Bank of England reacts faster than the ECB. But the UK is a different economy.

The Fed, the ECB and the Bank of Japan all have work to do.

The paper is the latest manifestation of the ECB's worries about the risks it is carrying as it battles the eurozone's mounting debt crisis.

Moreover, the ECB remains adamant that it cannot intervene as the lender of last resort to euro-zone sovereigns.

One pernicious side effect of the ECB's policy was to get banks addicted to easy central bank money.

The composition of the ECB board will change in 2012, which might offer a window of opportunity for a policy shift.

On April 2nd the ECB reduced its main interest rate by a quarter of a percentage point, less than expected, to 1. 25%.

The decision could reopen old wounds between the ECB and its largest member, Germany.

But were a bank or a solvent economy suddenly to fall prey to a market panic, then governments and the ECB would surely step in.

Had it downgraded Greece, the country's government bonds would not have been eligible for use as collateral for loans from the ECB.

But Trichet maintained a reluctance to see the ECB's interest rates fall to zero.

Such pressure will be resisted by the Germans, who remain comfortable with the euro's strength and always hate criticism of the ECB.

The ECB has achieved this trick through a clever shift in its liquidity policies.

The cheaper dollar swap lines with the Fed will let the ECB provide cheaper dollar loans to European commercial banks.

Mr Noyer did not rule out further cuts in the ECB's main interest rate, currently 1. 5 per cent, the lowest ever.

Its members could strike a grand bargain that deploys the ECB's balance-sheet and some form of Eurobond in exchange for fiscal integration.

The ECB has responded as a lender of last resort to the banking system, expanding and extending its liquidity lines for banks.