ECB unveils next steps in stimulus withdrawal

ECB unveils next steps in stimulus withdrawal
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First Published: Thu, Mar 04 2010. 09 32 PM IST

Continued uncertainty: ECB president Jean-Claude Trichet Andrew Harrer / Bloomberg
Continued uncertainty: ECB president Jean-Claude Trichet Andrew Harrer / Bloomberg
Updated: Thu, Mar 04 2010. 09 32 PM IST
Frankfurt: The European Central Bank (ECB) took further steps to unwind the extraordinary help it has given the euro zone economy in the global crisis on Thursday, although it still forecasts a fragile recovery.
Continued uncertainty: ECB president Jean-Claude Trichet Andrew Harrer / Bloomberg
ECB said it would return next month to ordinary competitive tenders for the three-month loans it gives banks, a sign that it is more comfortable with the state of the system and the latest stage in a gradual withdrawal of billions pumped into banking in the worst days of the crisis in 2008. That, and the decision to keep interest rates unchanged at a record low for the 10th month running, were in line with market expectations, though the move pushed euro interest rate futures briefly higher.
As expected, however, the bank also kept access to one-week loans unlimited, with policymakers keeping one eye on a massive €442 billion (Rs27.67 trillion) of 12-month ECB loans that banks must repay at the start of July.
The bank’s new staff forecasts also showed little improvement from the last update last December, underlining that Europe’s economic recovery looks far from firmly set.
Growth in 2010 was seen in a range of 0.4-1.2% from between 0.1% and 1.5% in December. Growth in 2011 was put at 0.5-2.5% from 0.2-2.2 %.
“The latest information has also confirmed that the economic recovery in the euro area is on track, although it is likely to remain uneven,” ECB president Jean-Claude Trichet told a news conference. “Overall, the Governing Council expects the euro area economy to grow at a moderate pace in 2010 in an environment marked by continued uncertainty.”
The bank also said it would index the final tender for six-month money in March to the main short-term operations.
Analysts say making banks bid again for the longer-term money will make it easier for ECB to reduce excess liquidity as it gradually normalises financing and starts to push up overnight interest rates towards the main refinancing rate. But they say the move will probably be accompanied by high allotments to avoid financial system hiccups.
In the back of policymakers’ minds, however, is the risk that the repayment of the 12-month money at the start of July risks upsetting money markets, whose problems were at the heart of the financial crisis.
“While there is a clear desire to return to normality and regain control of the interest rate instrument, tensions surrounding Greece and the banks in general are likely to inject some concern that a too fast exit could be dangerous,” Goldman Sachs economist Erik Nielsen said in a note. “One week operations ... will be left as fixed-rate full-allotment operations.”
ECB staff saw inflation in a range of 0.9-2.1% in 2011 from 0.8-2% in December’s forecast.
“This (rate decision) is just confirmation that the economic outlook warrants low interest rates,” said RBS economist Silvio Peruzzo.
The Bank of England also kept its rates on hold on Thursday, at 0.5%.
Kirsten Donovan in London contributed to this story.
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First Published: Thu, Mar 04 2010. 09 32 PM IST