By Johanna Treeck

FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet on Thursday said that a second round of quantitative easing by
the U.S. Federal Reserve will not alter his institution’s monetary
policy considerations and confirmed the central bank may resume its exit
from non-standard policy measures as early as next quarter.

Much as expected, however, Trichet made no firm commitments on the
exit path ahead, instead promising a rendezvous in December.

Interest rates were left unchanged for the 18th consecutive month
and Trichet continued to describe them as “appropriate.” The rise in
interbank rates should not be read as a monetary policy signal but
rather as a function of improving money markets, he reiterated.

Whether this improvement is substantial enough to further withdraw
liquidity support in the first quarter will be revealed in December,
Trichet said, offering few insights into the current state of
deliberations.

Confirmation by Trichet that the ECB is looking for ways to wean
addicted banks off ECB funds may be read as a sign that the central bank
means business in addressing the problem that has thus far held it back
from a more rapid exit from its crisis-driven nonstandard liquidity
measures. In previous appearances, Trichet had erred on the side of
caution in his public utterances on that subject.

Trichet said it “isn’t a normal situation” to have financial
institutions addicted to special ECB funding. “We are reflecting
permanently on what could be done,” he said.

Any future unwinding of liquidity support, however, is likely to be
very incremental. In fact, without being prompted, Trichet once again
reiterated that the central bank could raise rates while keeping some of
its non-standard measures in place. Given how distant the first rate
hike appears to be, this does not signal a quick return to normality.

“We will have to make up our mind and see what we do for the next
month, and the rendezvous is for December from that standpoint,” Trichet
said.

Even in a month from now, however, Trichet should not be expected
to make any commitment with regard to the central bank’s bond buying
program. While the ECB is not ready to take the heat off governments to
implement needed fiscal adjustments — as reflected by the bank’s
absence in the market over recent weeks despite rising spreads — the
Council does not seem ready to drop the only instrument it has to
address sovereign debt tensions. Used or unused, the program will likely
stay in place for some time.

Wednesday’s decision by the U.S. Federal Reserve to embark on a
second round of quantitative easing by buying $600 billion worth of U.S.
Treasury bonds will not stand in the way of any further ECB exit
considerations, Trichet said.

“We have our mandate and…the Governing Council of the ECB is
faithful to its mandate,” he said. “So no further comments on what is
done by other central banks that have their own responsibility and their
own environment.”

Trichet said that he had no reason to believe the U.S. is “playing
the strategy or tactics of a weak dollar,” adding that he shares and
trusts their expressed view “that it is in the interest of the U.S. to
have a strong dollar.”

The central bank makes its decisions based on all information
available, and exchange rates are but one aspect, Trichet said. So far,
the recent rise of the euro does not appear to have tainted the
Governing Council’s assessment of the Eurozone’s economic outlook.

The introductory statement on the growth and inflation outlook
remained largely unchanged from last month. Substantial changes were
made only on the monetary analysis and, if anything, these would point
to a more hawkish stance. Trichet observed that recent data on loans to
non-financial corporations “suggest that a turning point was reached
earlier in 2010.”

Again, Trichet promised a more detailed update in December, when
the central bank is due to release its latest staff forecasts for GDP
and inflation. At that time, the full impact of new U.S. easing measures
on the euro may yet alter the analysis as exchange rates could begin to
play a more dominant role.

The ECB president launched some tough criticism of the EU’s recent
economic governance reform proposals, emphasizing that “they do not go
as far as the quantum leap” that the Governing Council had been calling
for.

“In particular, the Governing Council is concerned that there will
be insufficient automaticity in the implementation of fiscal
surveillance,” he said. He also thinly veiled objections to any future
crisis resolution framework that would include an orderly default
mechanism, stressing that all decisions must be “designed to reinforce
financial stability and, of course, not to go against financial
stability.”

According to EU officials quoted in press reports recently, the ECB
chief voiced concerns to European leaders last week about a crisis
mechanism that would explicitly put private sector bond investors on the
hook in future bailouts via restructuring of sovereign debt. It could
push up borrowing costs for peripheral countries, thus exacerbating the
current crisis, Trichet warned.

“We are in a position where we feel perhaps more intensely the
importance of having the economic union functioning as well as
possible,” he said. “We are responsible for the monetary union. We feel
the importance of the good functioning of the economic union with great
intensity,” Trichet said.

The “intensity” of the Council’s feeling may be partly attributed
to the fact that EU leaders’ reform proposals up until now — far from
supporting the ECB’s attempt to restore trust and stability in the
Eurozone — have continued to unsettle markets in recent weeks and may
ultimately force the central bank to delay an exit from non-standard
measures yet again.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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