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ECB's Trichet to Germany's Merkel: Back Off

The head of the European Central Bank refused to be bullied into changing policy Thursday following comments by German Chancellor Angela Merkel regarding her concerns that the central bank's loose monetary policy could lead the global economy into another, bigger crisis over the next decade.

ECB President Jean-Claude Trichet said Thursday at an ECB press conference he had spoken to the Chancellor on the phone Wednesday and had been assured that she was not trying to challenge the ECB's independence.

"We are fiercely attached to independence," Trichet said. "We have a fierce, fierce attachment to delivering price stability," he told CNBC's Silvia Wadwha (watch the interview in the video below).

Trichet said he refused to cut interest rates in 2004 when European leaders where desperate to force the value of the euro lower and maintained that his current policy of buying up $85.7 billion of covered bonds to try and boost liquidity would not be influenced by any national leader or government.

The ECB left rates on hold at 1 percent Thursday and Trichet explained how the central bank would start purchasing bonds rated between AA and BBB- next month in the primary and secondary markets.

After the press conference, CNBC asked him how he intends to "sterilize" the covered-bond program.

There will be some sort of automatic sterilization if there appears to be a need for further action to be in line with our monetary policy, Trichet told CNBC. He made clear the move was not quantitative easing, instead calling it "part of our enhanced credit support policy."

During the press conference, Trichet said the ECB expected the euro zone recession to last another year and slashed its forecasts for the 16-country economy this year. ECB staff predicted the economy would now shrink by up to 5.1 percent this year, compared with their estimate of a 3.2 percent decline.

The influence of a very bad fourth quarter and first quarter is the big reason why all projections have been revised down, he told CNBC. "What we see clearly is that recovery will take place in the course of next year," he added.

Trichet left the door open for further rate cuts, telling that CNBC 1-percent interest rates are not the floor for the central bank.

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