PARIS (MNI) – European Central Bank President Jean-Claude Trichet
had little to say about the Federal Reserve’s new round of QE2, but what
he did say made clear that the ECB feels no pressure even to lean in the
same direction, according to analysts who listened to Trichet’s monthly
press conference today.

In a largely bland and decidedly non-newsy event, Trichet offered
no explicit comment on how or when the ECB might withdraw its remaining
nonstandard liquidity measures, though he made clear the Governing
Council is still watching and waiting for the right time to do so.

His reiteration of the view that higher market rates are a sign of
normalization was read by some as suggesting that the ECB will announce
new exit moves — probably a return to competitive bidding on 3-month
operations — after its December meeting. Some, however, thought the
bank might wait until after the first quarter to implement such a move.

Interest rates, on the other hand, are expected to remain on hold
well into 2011, with some expecting no rate hike until sometime in 2012.

Below are excerpts of analysts’ comments:

JENNIFER MCKEOWN: After leaving interest rates on hold today, the
ECB signalled that it is certainly not ready to follow the Fed into a
renewed bout of unconventional policy support. Bolder action might yet
be taken once the recent recovery starts to falter. But for now, the
Bank’s relatively unsupportive stance will maintain upward pressure on
the euro and poses a serious risk to the economic outlook.

RAINER SARTORIS, HSBC Trinkaus: Concerning interest rates we don’t
think that there will be any change in the next 6-12 months, but the ECB
is looking for an exit from the extra measures that they implemented. I
think it is obvious that the ECB has no clear view on this topic right
now and there will be a decision in December. So far our main scenario
is not that they will stop providing unlimited liquidity concerning the
three month tender in December. They will provide it also for first
month next year. The point is not so much the economic outlook. It is
more about the financial system, the banking system. Mr. Trichet said
that [the non-standard measures are] temporary and that the ECB cannot
give drugs to the banking system forever. In our eyes the point for
[withdrawal] of these measures has not arrived yet.

ARND SCHAEFER, West LB: In my view, the ECB and Trichet are still
on track. We are not changing our assumptions. Non-standard measures are
being withdrawn one after the other. What is important to me is that the
ECB clearly stated that it is independent with respect to Brussels and
reform of economic governance. Trichet made it clear that reform is not
going far enough. He also proved his independence by not commenting on
the Fed’s decision. The price level is still the decisive point for the
ECB.

HOWARD ARCHER, IHS Global Insight: The odds still heavily favour
the ECB keeping interest rates at 1% deep into 2011. While Eurozone
economic activity still seems decent overall, it has clearly lost some
momentum compared to a few months ago, and the ECB is very aware that
the Eurozone recovery could be pressured markedly over the coming months
by serious headwinds, notably including tightening fiscal policy and
slower global growth. The stronger euro also threatens to weigh down
growth. Furthermore, raising interest rates would add to the problems of
countries such as Greece, Ireland, Portugal and Spain. Meanwhile, there
seems good reason to expect underlying inflationary pressures to remain
muted in the Eurozone given overall gradual recovery, significant excess
capacity, muted wage growth and the stronger euro.

MICHAEL SCHUBERT, Commerzbank: I think the most important message
is that the ECB followed its own course. Trichet highlighted that the
each central bank must be faithful to its mandate. The ECB’s mandate is
different to the Fed, and obviously it is unlikely that the ECB will do
something similar to the Fed. What is important to the ECB is always the
outlook for growth and inflation, and this outlook has not changed. Thus
the ECB is sticking to its wait-and-see policy. I sensed a slight
tendency to continue with the exit of non-standard measures. The ECB
sees normalization of money market rates. Trichet highlighted the rise
of money market rates, and this is exclusively due to the lower demand
of commercial banks for ECB liquidity. From ECB’s point of view this is
a positive sign. If there is normalization of financial markets, then
unconventional measures are not needed anymore. In the medium term, or
next year, we might see a continuation of the exit, provided there are
no further strains of the debt crisis in euro area.

JEAN-CHRISTOPHE CAFFET, Natixis: Trichet did not mention any
phasing out of non-standard measures (NSM) after having said last month
that it was ‘observable.’ He only reaffirmed that [the measures] were
transitory by nature, probably in order to minimize the difference in
this regard between the ECB and other major central banks (the Fed, the
BoJ). GDP growth and inflation prospects over the medium to long term
suggest a long lasting status quo on the main ECB refi rate. Besides,
financial developments — sovereign debt markets, the banking sector —
may hamper the normalization and thus delay the exit strategy from
non-standard measures during 2011. All in all, we favour a scenario with
no rate hike over the next 24 months.

CARSTEN BRZESKI, ING Financial Markets: On bond purchases, Trichet
did not say anything new. Despite widening spreads of Eurozone periphery
countries, the ECB has done very little recently. Since the face-off
between Weber and Trichet, it has hardly bought government bonds
anymore. According to Trichet, the ECBs bond purchasing programme was
not over, yet. He even suggested that next week’s settlement data of
bond purchases would illustrate this. Still, the (relative) inactivity
on the bond purchases could also be a reaction to the — at least in the
ECB’s view — lack of ambition in European leaders’ plans to reform the
fiscal framework. In a kind of tit-for-tat, the ECB does not seem
willing to deliver short-term solace for governments if these are not
doing their part of the job. Was Axel Weber right after all? On the
dollar, Trichet seems to be one of the few people (maybe the only one)
in the world to still believe in the US administration’s strong dollar
policy….In our view the ECB’s next step will be to bring an end to the
full allotment procedure on 3-month LTROs. Given the weakness of the
peripheral banks, it is not impossible that the full allotment will only
end after the first quarter of 2011. A first rate hike will not come
before the second half of 2011.

JUERGEN MICHELS, Citigroup: As in previous months, the ECB
continued to sound a bit less confident about the outlook on low
inflation. Compared to the last month, the ECB dropped this month the
reference of ‘weak money and credit growth’ when exploring the outlook
for medium-term inflation. Furthermore, the statement is somewhat more
upbeat on the developments in loan growth to the non-financial sector,
claiming that ‘a turning point was reached earlier in 2010′. In the Q&A
session, Mr. Trichet regarded the reduction of banks’ use of ECB’s
liquidity and the increase in short-term money market rates as a
positive sign of normalization. This suggests that the ECB is set to go
ahead with the next move on the exit strategy by announcing an end of
the full allotment in the 3M LTROs at the next ‘rendezvous’ in December.

–Paris Newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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