By Johanna Treeck

FRANKFURT (MNI) – European Central Bank President Mario Draghi on
Thursday hailed the ECB’s first three-year tender as a success,
declaring that it has already begun to bolster the Eurozone’s economy
and will continue to do so.

With the E489 billion borrowed by Eurozone banks last month seeping
into the real economy and a second three-year refinancing operation
scheduled for next month, the ECB is unlikely to announce further
non-conventional measures anytime soon.

On interest rates, however, Draghi remained noncommital, leaving
the door open for further cuts after the Governing Council decided
unanimously to keep rates on hold at their monthly monetary policy
meeting today.

According to the introductory statement drawn up by the Governing
Council, data since the last rate setting meeting “broadly confirms” the
ECB’s previous analysis of the economic outlook.

Although Draghi observed “tentative signs of a stabilization in
activity at low levels,” he continued to stress high uncertainty and
“substantial downside risks.”

Asked about a possible rate cut in February, Draghi said the ECB’s
monetary policy stance “is accommodative and will remain accommodative,”
suggesting the ECB may not see an immediate need to ease policy further
next month.

On the other hand, Draghi said the ECB stands “ready to act,” and
he signalled once again that the bank no longer considers 1% as the
effective floor of its main refinancing rate, thus keeping options open.

Draghi would not fuel speculation that the ECB is readying for
quantitative easing should interest rates eventually hit their floor.
While the ECB president did not exclude the possibility, he stressed
that the “route that the ECB has undertaken is based on enhancing the
bank lending channel.”

The effectiveness of that route will likely determine the need for
further easing action ahead. The ongoing extensive use of the ECB’s
deposit facility following the three-year had raised doubts over the
effectiveness of the central bank’s approach.

Draghi, however, gave a very positive assessment of the impact of
the ECB’s first three-year tender and said that he expects demand for
the second operation on February 28 to be “substantial.”

The ECB chief asserted that the first operation had already helped
to prevent a credit crunch in the Eurozone and stressed that the high
usage of the deposit facility does not mean that the money isn’t finding
its way into the real economy.

“We really see evident signs that this money does not stay in the
deposit facility. This money circulates in the economy,” Draghi said,
emphasizing that banks that have borrowed money in the ECB’s liquidity
providing operations are not the same as those depositing it in the
central bank’s overnight window.

“We also saw interest rates declining substantially if not
dramatically — initially on the short part of the curve and now on the
long part,” Draghi said.

He welcomed Thursday’s successful Italian and Spanish debt auctions
but said it was too early to assess whether they may be the result of
banks using cheap ECB cash to invest in much higher-yielding Eurozone
debt.

Some policy-makers, most notably French President Nicolas Sarkozy,
had expressed hope that ECB liquidity injection would lead to a massive
carry trade, helping to suppress borrowing costs for troubled Eurozone
peripheral countries.

Since institutions able to borrow at the ECB are not identical to
those bidding in sovereign debt auctions, it is not possible to assess
the relative importance of the two types of actors yet, Draghi said.

Should it turn out that banks with access to ECB funding were
indeed the same ones that bid for Spanish and Italian debt, then
Thursday’s successful debt auctions would likely be interpreted as the
start of a positive trend and could allow the ECB to wind down or even
terminate its contested government bond purchases.

Draghi, however, was very clear that for now the positive impact of
the three-year tender is not strong enough to halt the bond buying
program, known as the Securities Market Programme (SMP).

Asked about that possibility, he replied: “You will certainly
remember that the main rationale for having SMP was the unclogging of
monetary policy transmission channels. We still see even nowadays that
the interbank market is not functioning.”

Draghi added: “We can see that there is some opening of the
unsecured bond market… but we really are at the beginning of this
process. Let’s hope it will continue.”

Overall, we are likely to see little change in the near term as
regards the ECB’s non-standard measures. The central bank hopes that its
massive liquidity injection will allow it to refrain from more
aggressive conventional and non-conventional policies.

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

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