ECB ready to phase out measures

The European Central Bank has taken its first step towards unwinding its extraordinary support measures for the euro zone economy by signalling that one-year loans to banks will not be repeated next year.

The ECB kept its main interest rate on hold at 1% for the sixth month after its monthly meeting, as expected.

ECB president Jean-Claude Trichet said he would announce a decision on the rest of the central bank's policy of flooding markets with cheap funds in December.

Allowing one-year lending to expire after mid-December would already be a step towards weaning banks off the funds which have pushed money market rates to record lows and helped re-start credit flows.

Asked whether the ECB was ready to drop its one-year operations, Trichet noted that financial markets were not expecting the ECB to announce more one-year operations next year. 'I will say nothing to dispel this present sentiment of the market,' he told a news conference. 'But the decision will be taken by the Governing Council in the next meeting in a month's time.'

Trichet stressed that the ECB's liquidity steps - including lending banks unlimited funds at fixed rates - would be phased out in a gradual but timely way, but would not continue at the same extent as in the past.

He declined to say, however, whether the ECB would bump up the price of funds from 1% at next month's 12-month operation - a move which would be taken as a signal of a likely rate rise before the end of 2010.

The ECB's stance contrasts with the US Federal Reserve, which made no change to policy on Wednesday despite growing confidence in a recovery, and the Bank of England, which today left rates untouched but said it would expand its quantitative easing programme by £25 billion.

Trichet also warned this afternoon that if euro zone governments did not address high budget deficits, this could undermine public confidence in public finances and an economic recovery.

By next month's meeting, the ECB will have updated staff economic projections and the first forecasts for 2011. Trichet said caution was needed on the economic outlook but said growth rates could turn positive before the end of the year.

'The latest information continues to signal an improvement in economic activity in the second half of this year,' he said, adding that the ECB expected the euro economy in 2010 to recover at a gradual pace.

Euro zone inflation remained negative in October, at -0.1%, but Trichet said this was expected to turn positive again in the coming months.

Think about fixing, say brokers

The country's largest group of independent mortgage and insurance brokers - PIBA - has said mortgage holders on variable rates should now consider fixing.

'With signs of recovery in Europe on the horizon it now looks as though the ECB might move to increase rates earlier than expected next year. The recovery in Germany and how it progresses is likely to dictate when the increase will happen,' said the PIBA's director of mortgage services Rachel Doyle.

She said that even if the ECB rate did not increase, lenders were likely to raise their variable rates in 2010. 'Therefore, mortgage holders on variable rates would be well advised to consider fixing for periods of five years or longer,' she said.