ECB sticking to stimulus exit plan -- Trichet
Published 05/11/2010 | 05:00
European Central Bank (ECB) president Jean-Claude Trichet signalled yesterday that the bank intends to stick to its exit strategy even after the Federal Reserve eased policy further, sending the euro to a 10-month high, and tensions on Europe's bond markets increased.
Policymakers would decide on possible further exit steps next month, Mr Trichet said after the ECB left its benchmark interest rate at a record low of 1pc. "The non-standard measures are by definition temporary in nature," he added.
The ECB's removal of emergency stimulus was being complicated by renewed concerns about the fiscal health of various countries, including Ireland, Portugal and Greece, and by the Fed's move to buy another $600bn (€422bn) of treasuries to prop up the US economy. Widening bond spreads and an appreciating euro may undermine Europe's economic recovery.
"One would never know that the Fed had just embarked upon a radical new stimulus strategy, based on the ECB's statement and the answers given," said Julian Callow, chief European economist at Barclays Capital in London.
The ECB's comments suggest "that the Governing Council is still minded to plough its own furrow going forward".
The Fed's stimulus programme, aimed at stamping out deflation risks in the world's largest economy, sent the euro as high as $1.4283 yesterday.
Mr Trichet said he has "no reason to think" that the Fed, the US Treasury and President Barack Obama were "playing a tactic of a weak dollar".
The ECB's tightening bias sets it apart from the world's other major central banks. The Bank of England yesterday left its key rate at 0.5pc and maintained its asset-purchase program at £200bn (€229bn).
The Bank of Japan may announce further asset purchases of its own at noon in Tokyo today.
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 10.1pc in September.
Exports from Germany, Europe's largest economy, declined for a second month in August.
"The underlying momentum of the recovery remains positive," Mr Trichet said. Inflation pressures would "remain contained" though risks are "slightly tilted to the upside", he added.
ECB policymakers have warned against keeping interest rates too low for too long, and some have said further exit steps may be taken early in 2011. The ECB has committed to providing 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, policymakers 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, saying risks outweigh any benefits. Yesterday, the ECB bought 10-year Irish government bonds. (Bloomberg)