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Euro-zone keeps rate on hold and hints of further removal of emergency stimulus

Friday, November 5th 2010 - 02:14 UTC
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The Euro soared to a nine month record following Trichet’s announcement The Euro soared to a nine month record following Trichet’s announcement

In a move that runs counter to the United States' Fed 600-billion-US-dollar liquidity injection to stimulate the economy the European Central Bank on Thursday kept its benchmark interest rate steady at 1%. This was the eighteenth consecutive month that ECB has frozen its main interest rate.

ECB President Jean-Claude Trichet said that there is a 'positive underlying momentum' in the region but that inflation could pose a risk. The Euro meanwhile hit a nine-month high following the ECB president comments logging in a 20% rise against the US dollar since June.

Regarding the liquidity policy to the financial system policy makers will decide on possible further exit steps next month, Trichet said at the usual press conference following the monthly ECB announcement. “The non-standard measures are by definition temporary in nature,” he said.

The ECB removal of emergency stimulus is being complicated by renewed concerns about the fiscal health of countries like Ireland, Portugal and Greece and by the Fed’s move to buy another 600 billion US dollars of Treasury bonds to prop up the US economy. Widening bond spreads and an appreciating euro may undermine the Europe’s economic recovery.

The Fed’s stimulus program, aimed at stamping out deflation risks in the world’s largest economy, sent the Euro as high as 1.4283 Thursday. The single currency has increased 19% against the US dollar since early June.

The ECB’s tightening bias sets it apart from the world’s other major central banks.

The Euro-area economy is showing signs of weakening after expanding at the fastest pace in four years in the second quarter. Expansion in the manufacturing industry has slowed from a peak in April and unemployment climbed to a 12-year high of 10.1% in September. Exports from Germany, Europe’s largest economy, declined for a second month in August.

“The underlying momentum of the recovery remains positive,” Trichet said. Inflation pressures will “remain contained” though risks are “slightly tilted to the upside,” he added.

ECB policy makers from Germany, Luxembourg, Belgium, Austria, Italy and the Netherlands have warned against keeping interest rates too low for too long, and some have said further exit steps may be taken in the first quarter of next year.

The ECB has committed to provide banks with unlimited liquidity in its weekly, monthly and three-month refinancing operations until the end of the year after abandoning its six- and 12-month loans. Next month, policy makers may decide whether to return to a bidding process in at least some of the lending procedures.

Bundesbank President Axel Weber has also called for an end to the bank’s bond purchases, arguing its risks outweigh any benefits. The ECB on Thursday bought 10-year Irish government bonds, according to three traders with knowledge of the transactions.

The program is “not over,” Trichet said, adding that the ECB only reports purchases after they settled. “You will see that the program exists.”

So far, the ECB has settled purchases worth 63.5 billion Euros. It sterilizes their impact on money supply by absorbing the same amount of liquidity from banks.

 

Categories: Economy, International.

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