The European Central Bank will start to unwind its crisis support for the eurozone economy this month but made clear on Thursday these moves are not meant to signal a coming rise in benchmark interest rates. Speaking after the ECB kept its main rate at a record low of 1 percent, ECB President Jean-Claude laid out a package of decisions on ending and tightening up the measures it has taken to boost liquidity to the banking sector.
-- Interest rates kept at record low, says 'appropriate'
-- Inflation set to stay below target into 2011
Trichet said the ECB would index the cost of funds at its next - and final - 12-month liquidity operation on December 16 to its main policy rate, linking it to the average minimum cost of funds in its regular weekly loans to banks. The move, a break from the ECB's recent practice of lending funds at a flat rate equivalent to its main policy rate - now 1 percent - sent the euro and eurozone bonds lower.
"The ECB is withdrawing from its non-standard operations at a somewhat quicker pace than we had expected," Barclays Capital economist Julian Callow said, adding the moves announce on Thursday could put upward pressure on short-term market interest rates. Trichet said the ECB had also decided to stop lending banks funds over six months after March, and did not extend the extra three-month operations it has been conducting over the last year, dropping back to its previous schedule of one per month.
But to smooth the blow, the ECB extended its policy of offering banks unlimited funds at fixed rates at its main weekly operations until at least Apr. 13, and for longer-term operations in the first quarter of 2010. Trichet firmly rejected the idea that indexing the cost of 12-month funds suggested a tightening policy path ahead.
"It should not be interpreted in any respect as a signal of interest rates," he told a news conference, confirming that the 22-member Governing Council was unanimous in considering rates appropriate. He also announced new forecasts by European Central Bank staff which upped their expectations for eurozone growth next year after the euro zone emerged from recession in the third quarter. However, the mid-point of their forecast range for 2011 inflation was still well below the bank's 2 percent ceiling.
The moves bring an end to more than a year of intensive ECB policy easing and herald a change of direction. But policymakers will probably want to avoid pushing for a rapid exit at this stage with countries including Spain still in the grip of recession, unemployment set to rise further and an already-strong euro threatening to sap the fledgling recovery.
Some central banks such as Australia's and Norway's have already begun to raise rates. But the US Federal Reserve has stuck to its commitment to ultra-low interest rates while taking some small steps to wind down its emergency support. At the far end of the scale, the Bank of Japan this week offered to pump more funds at banks to lower longer-term money market rates.
Trichet said on Thursday staff saw inflation in a range of 0.8 to 2.0 percent in 2011, the crucial period for today's monetary policy decisions given the long lead time and implying little need for rapid interest rate rises. Staff revised up forecasts for growth in 2010 to between 0.1 percent and 1.5 percent, from between -0.5 and +0.9 percent in September forecasts.
ECB staff also upgraded their projections for this year, and said they expected gross domestic product (GDP) to fall between 3.9 and 4.1 percent in 2009, a slightly smaller contraction than the 4.4 to 3.8 percent range given in September. "Some of the factors supporting the recovery at present are of a temporary nature," Trichet said.
"The Governing Council expects the euro area economy to grow at a moderate pace in 2010, recognising that the recovery process is likely to be uneven and that the outlook remains subject to high uncertainty."
Inflation remains subdued after months of falling prices and the bank is not expected to start to raise interest rates before the end of next year. ECB staff edged up their inflation projections but inflation next year was seen remaining well under the ECB's target of below, but close to 2 percent. The staff projections put 2010 inflation between 0.9 and 1.7 percent, from 0.8 and 1.6 percent in September.
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