While they are injecting liquidity they are keeping open the option of hiking interest rates,'' said Marco Annunziata, chief economist at UniCredit Markets & Investment Banking in London.
A week ago, investors bet that the global contraction in credit would prevent the ECB lifting its benchmark rate from 4 percent. That view is now in doubt after the ECB on Aug. 22 loaned an additional 40 billion euros ($55 billion) to banks and said it was sticking to the policy stance expressed by Trichet on Aug. 2. Then, he promised "strong vigilance,'' a phrase used to foreshadow each of the eight rate increases since 2005.
Investors reacted by reviving their wagers that the ECB will boost borrowing costs by a quarter point next week. The implied rate on the September interest-rate futures contract rose to 4.57 percent last week from 4.34 percent on Aug. 10.
At the same time, some economists have scrapped their forecasts for further ECB tightening.
"Additional tightening from the ECB now risks exacerbating the current crisis and could prompt an even sharper slowdown,'' said James Nixon, an economist at Societe Generale SA in London who used to work as a forecaster at the ECB. ``We now expect the ECB to hold rates at 4 percent until at least the spring of next year.''
There is evidence that the fallout from the collapse in the American market for subprime mortgages is hurting Europe.
BNP Paribas SA, France's biggest bank, was forced to halt withdrawals from three of its investment funds, while Landesbank Sachsen Girozentrale, the German state-owned bank, is getting emergency funding and being bought by Landesbank Baden- Wuerttemberg.
UBS AG, Europe's largest lender, said Aug. 14 profit may decline for the rest of the year. On Aug. 15, Merrill Lynch & Co. equity analysts cut their rating on Deutsche Bank AG, saying the squeeze in credit markets will reduce earnings.