By Johanna Treeck
FRANKFURT (MNI) – The European Central Bank, in the face of fresh
money market tensions, took another step backwards in its planned exit
from non-standard liquidity measures by announcing that banks will
continue to receive all the funds they require in three additional
upcoming longer-term operations.
The move should assure markets that the central bank remains ready
to do everything necessary to keep money markets functioning, and that
it has no intention to steer market rates higher for the rest of this
year.
ECB President Jean-Claude Trichet confirmed that the bank will
continue to buy government bonds for now but he declined to disclose
desired details of the ECB’s bond buying program. He was also rather
elliptical on recent foreign exchange rate developments.
Trichet announced that the ECB would conduct fixed rate, full
allotment tenders in the regular three-month refinancing operations
scheduled for July 28, August 25 and September 29. Trichet said that in
the months ahead, “the overall provision of liquidity will be adjusted
as appropriate.”
In March, when its gaze was fixed more firmly on the exit, the ECB
announced it would stop conducting its three-month tenders on a
fixed-rate, full allotment basis. But the market turmoil that has ensued
forced the bank to change tack. It already announced in May that its
June 30 three-year LTRO would provide full allotment at a fixed rate.
Today’s decision should further smooth the transition when E442
billion in 1-year loans expire on July 1, sucking out 90% of net
outstanding loans. It effectively means that banks will be able take out
as much money as they want until the end of this year, since the
September 29 operation expires at the end of December.
It also suggests that the central bank does not plan to tighten
liquidity conditions, thus keeping EONIA and Euribor rates at their
current low level for longer. That should reinforce expectations that
official interest rates will be kept on hold until well into next year.
The ECB president confirmed that the central bank will continue to
buy bonds from the Eurozone’s periphery in the near term after declining
purchase volumes in recent weeks and a resistance to the program on the
Governing Council had raised doubts about the strength of the ECB’s
commitment. “We consider that it is appropriate to continue to do what
we have decided to,” Trichet said.
However, he remained tight-lipped about the scope and the details
of the program.
“I will not comment on the future. I said we had a very, very clear
target which was not changing the monetary policy stance and was helping
to restore appropriate functioning of monetary policy transmission. We
will see what happens.”
Trichet emphasized again that the ECB will sterilize all purchases
made under the program. After accidentally sending out a test
announcement saying the bank would issue debt certificates worth E10
billion to mop up liquidity for three months, Trichet did not confirm
such intentions today.
“We are looking at all possible instruments. But there is
absolutely nothing immediate in this domain,” he said.
Although a lack of market confidence in Eurozone leaders has sent
the euro’s exchange rate spiraling downward in recent weeks, Trichet
refrained from stepping up verbal currency intervention.
“The euro is a very credible currency,” he said, adding that the
single currency “has an exceptional track record in preserving price
stability.” A second question on the same topic did not elicit a more
detailed answer or a characterization of recent currency movements as
“abrupt.”
Some Council member’s have recently suggested that the declining
works in favor for the Eurozone, given the weak growth outlook and
absence of inflationary pressures.
While the sharply lower euro and an uptick in global growth may
have raised short-term prospects for the Eurozone, Trichet treated
recent signs of recovery with extreme caution.
The midpoint of the new staff GDP forecast for 2010 was raised to
1.0% from 0.8%, “owing to the positive impact of stronger activity
worldwide in the short run,” Trichet said. The growth forecast for 2011
was cut, however, “reflecting mainly domestic demand prospects,” he
said.
Overall, however, the Council sees “uneven” and “moderate” economic
growth, thus leaving its basic outlook unchanged.
On the price front, the new forecasts continue to show inflation
well below the ECB’s price stability threshold of close to but below 2%.
HICP is now expected at 1.5% this year, up from the 1.2% projected
midpoint in March 2010. For 2011, it is seen dipping to 1.1%, compared
with the previous forecast of 1.5%.
The Council continues to “expect price developments to remain
moderate over the policy-relevant medium-term horizon,” Trichet said.
He also warned that the road ahead is characterized by “unusually
high uncertainty” amid an “environment of continued tension in some
financial market segments.”
In light of this uncertainty, the ECB wants to maintain maximum
flexibility on non-standard measures in the months ahead, and it is
resigned for now to keeping both ultra low rates and a non-conventional
policy framework in place.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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