What did the ECB decide to do?

While the FED was clear about stabilizing the crisis with lowering interests rates dramatically, the European Central Bank (ECB), which first was expected to stimulate its rates, decided to keep its interest rates in the Eurozone on hold at 4%.

The ECB was even expected to raise rates in a bid to stem rising inflation, after the BNP Paribas freezed three investment funds with connections to American asset backed securities (BNPQY, News, People) earlier this year.
Somehow though, expectation went completely wrong as the ECB decided to do whatever it’d take to preserve price stability, and as such pay huge amounts of money in order to prevent inflation.





In August 2007 the ECB offered to loan more cash to banks to help ease the troubled market. By then its attempt to add more liquidity to money markets has seen the ECB lend over 253 billion euros.
Furthermore the ECB indicated afterwards, that they were willing to inject much more liquidity into the markets as they’d do whatever it’d take in order to contribute to orderly conditions. This statement made analysts believe that unchanged interest rates were confirmed, given the ongoing financial market turmoil, July's sharp fall in consumer price inflation, and the current major uncertainties about the inflation and growth outlooks.

By December 2007, the ECB was one of five central banks that had injected billions in emergency cash into money markets, with the aim of cutting the cost of lending between retail and commercial banks.
At this time the hope was that lower interbank rates would mean that banks would be able to make funds available at cheaper rates to companies and individuals. By cutting short-term lending rates, the two-week euro Libor rate fell sharply and the ECB succeeded, however the rate still remained above the 4% ECB refinancing rate.

Anyhow, the main aim of the ECB, while boosting liquidity into the banking sector, was to ensure banks kept offering credits to businesses, as those banks feared that they might need any spare cash in order to cover their losses and stopped lending.

Until today, the ECB has not followed the Fed's lead in lowering official interest rates and the Bank of England has also proved more reluctant to ease policy.
Analysts believe that the BoE should not follow the Fed's example with big interest rate cuts and said central banks were taking similar action to ease lending conditions by providing additional funds as required.

To end up with, we can underline the fact, that even though the ECB is making a huge amount of debts, its strategy helps easing the crisis a lot, as even though the ECB keeps on boosting liquidity into the market, the strong held of its interest rates assures price stability.