THE EUROPEAN Central Bank (ECB) last night embarked firmly on dismantling the exceptional measures it has taken to shore up the euro zone’s financial system, even as it remained highly cautious on prospects.
ECB president Jean-Claude Trichet went further than markets expected in unveiling the next stages of the bank’s “exit strategy” to unwind measures that flooded banks in the euro zone with liquidity after the collapse of Lehman Brothers in 2008.
But amid signs of divisions within the ECB’s 22-strong governing council, Mr Trichet said it would act only “gradually”.
In an apparent reference to weaker banks’ continuing dependence on emergency liquidity, he said the ECB recognised “various constraints”.
Mr Trichet added: “Liquidity will remain extremely abundant for a large number of months.”
With fresh ECB forecasts showing inflation in 2010 and 2011 well below its target of an annual rate “below but close” to 2 per cent, Mr Trichet also insisted that he was not sending any “signal” about a hardening of the ECB’s monetary policy stance.
The bank’s main policy interest rate remained at 1 per cent – its lowest – and Mr Trichet appeared happy with market expectations that official borrowing costs will stay unchanged until late next year.
Agreement in the council on the main interest rate had been “unanimous”, Mr Trichet said, but decisions on dismantling emergency liquidity support had been by “consensus”.
Some governing council members might have worried that the ECB was acting too rapidly. The ECB’s liquidity boosting operations have become dominated by offers of unlimited one-year loans at the 1 per cent interest rate.
In June, euro-zone banks absorbed €442 billion of such liquidity, the largest amount of money to be injected in a single operation.
Mr Trichet confirmed that one-third of such injections this month would be the last, and announced that the interest rate charged would be linked to the main policy rate during the following 12 months, which is likely to limit demand. The ECB would continue to match in full banks’ demands for liquidity in its regular weekly operations at least until mid-April, Mr Trichet added.
However, offers of six-month liquidity would end after an operation scheduled for March. The frequency of offers of three-month liquidity would also be reduced.
The central bank’s forecasts were gloomier than those of private-sector economists, although they were revised up from its September projections.
The euro-zone economy was expected to grow next year at a rate in a range with a midpoint of 0.8 per cent and 1.2 per cent in 2011. France and Germany are powering the euro zone’s recovery.
Spain, Ireland and Greece continue to contract. Mr Trichet said that “the recovery process is likely to be uneven” and the outlook “subject to high uncertainty”.
Euro-zone inflation next year was expected to be in a range with a mid-point of 1.3 per cent, and expected to rise to 1.4 per cent in 2011.
