ECB Mulls Gradual Exit
11/6/2009 4:04 AM ET
(RTTNews) -
Thursday, the European Central Bank President Jean-Claude Trichet gave a strong indication that the central bank is preparing to rollback unconventional measures to mop up excess liquidity from the Eurozone economy.
"Looking ahead, and taking into account the improved conditions in financial markets, not all our liquidity measures will be needed to the same extent as in the past," Trichet said in his introductory statement after the ECB Governing Council retained its key interest rate at a record low of 1% for a sixth straight month. "The current rates remain appropriate," he reiterated.
As global economic conditions have started moving to a pre-crisis level, central banks are preparing to wind up their emergency measures.
In October, Australia became the first among G-20 nations to hike interest rates since the onset of the financial crisis in late 2008. The Reserve Bank of Australia raised its key interest rate for the second straight month on November 3. On October 27, India's central bank ended some of its liquidity support measures, signaling the start of its exit strategy. A day after, Norway's central bank became the first in Europe to raise key interest rates as economies in the region show signs of emerging from the financial crisis.
Trichet said the Governing Council will make sure that the extraordinary liquidity measures taken are phased out in a timely and gradual fashion. The bank will also ensure that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term. "The bank is clearing the way for withdrawing some of its extraordinary liquidity support measures," IHS Global Insight Chief UK and Eurozone Economist Howard Archer said.
The ECB's rate-setting body is likely to take a decision in December on ECB's programme of offering 12-month money to banks at just 1%, Trichet said. Banks drew EUR 75 billion at the last offering in September, down from EUR 442 billion in the first tender in June, suggesting that market conditions are improving.
The central bank chief refused to "dispel" a market view that the scheme would not be extended beyond December. Further, he declined to indicate whether or not the ECB would apply a spread to December's operation. "The ECB will opt for the gentle backdoor exit for its non-standard measures, not for an active withdrawal of liquidity, by not extending these 12-months operations in December," ING economist Carsten Brzeski said.
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