By Johanna Treeck
FRANKFURT (MNI) – The European Central Bank’s monthly press
conference is likely to focus on the assessment and future path of
non-conventional policies, after the sovereign debt crisis forced the
ECB to reverse course on its planned exit from liquidity measures.
In a late development, the ECB on Wednesday accidentally sent out
an announcement saying the bank would issue debt certificates to mop up
liquidity for three months. The ECB said it was only a “test,” but it
now seems likely there will be an official announcement on that topic.
Observers of tomorrow’s press conference will also watch out for
the new ECB staff macroeconomic forecasts and listen for the extent to
which the Governing Council endorses the fresh projections.
While new staff forecasts for 2010 are widely expected to be
revised upwards for both growth and inflation, the introductory
statement’s assessment of economic developments in the coming months may
nonetheless be little changed.
Stronger global growth, the weaker euro and higher oil price
assumptions should drive up the current forecast mid-points of 0.8% for
growth and 1.6% for inflation.
At the same time, however, fresh money market tensions and the debt
crisis have increased downside risks, while fiscal tightening measures
are seen weighing on growth, and core inflation is trending downwards.
As a result, ECB President Jean-Claude Trichet may downplay any
brighter reading and continue to forecast moderate and uneven growth
ahead coupled with moderate price developments over the medium term.
He should also reiterate that the outlook remains subject to
considerable uncertainty. One key source of this uncertainty are fresh
money market tensions and the impact that the expiry of E442 billion in
1-year loans on July 1 may have on fickle markets.
The volume of liquidity pulled from the system when those LTRO
funds are paid back amounts to more than half of total outstanding ECB
loans to credit institutions — and over 90% of net outstanding loans
once funds on deposit at the ECB are subtracted.
Trichet will use all his verbal powers to calm market fears of the
big payment day, but whether the ECB takes another step backwards on
its exit strategy and offers extra liquidity injections is less certain.
At the beginning of May, the ECB already reversed its exit from
non-standard measures by announcing an additional 6-month tender and two
fresh 3-month tenders with full allotment procedures.
The second 3-month tender with full allotment announced in May
coincides with the expiry of the one-year tender and should therefore
effectively prevent any potential liquidity shortage. At the same time,
the continuation of full-allotment for the weekly operations until
October 12 should help smooth the transition.
The ECB may therefore await results of the upcoming 3-month tender
and then decide, based on demand at that operation, whether to conduct
future 3-month tenders on a full allotment basis. The advantage of this
approach would be to keep extra liquidity as limited as possible,
allowing for an easier exit down the line.
On the other hand, the ECB could decide to announce the
continuation of full allotment for 3-month operations Thursday so as
preclude any exacerbation of money market tensions. On Tuesday, the ECB
loaned over E122 billion in its weekly operation to 96 banks, after
E117.7 billion to 86 bidder in the previous week. This suggests that a
rising number of banks may have liquidity problems.
Offering another 1-year operation or even a 6-month operation later
this year would leave control of money market rates in the hands of
banks into next year and might thus be considered more problematic.
Use of the ECB’s deposit facility, which soared to a record high of
364.6 billion on Tuesday, suggests that overall demand for fresh funds
should fall short of the E442 billion expiring, leading to a net drain
in liquidity and possibly higher market rates ahead.
Trichet will also likely be questioned about the ECB’s government
bond buy program — the Governing Council’s assessment of results thus
far and the road map ahead.
Council heavyweight Axel Weber’s repeated criticism of the program,
and the limited volume — E40.5 billion thus far — have raised doubts
about the central bank’s commitment to it, and yields on Italian and
Spanish bonds have exceeded levels seen before it started.
Trichet is likely to reaffirm the central bank’s commitment to the
program and say that the ECB stands ready to act if necessary. The
president may also point to experience with the E60 billion covered bond
purchase program: it also took a couple of months for the purchases have
an effect on the market and for confidence to return.
Any further details, such as total amount or types of bonds
earmarked, are unlikely to be disclosed.
Trichet can be counted on to stress, as he has repeatedly, that the
full amount of the bond purchases will be sterilized. The debt
certificates likely to be announced provide another instrument — in
addition to the term deposits — for doing that.
In its prematurely distributed announcement, the ECB said it would
issue debt certificates with three-month maturities for an amount of E10
billion. Market will be waiting to see if those details are confirmed.
Following the euro’s ongoing rapid decline, the president is likely
to be probed on the Council’s assessment of forex developments.
While the euro is still well above its historical trough of around
$0.82 and is still in-line with the historical average of around $1.18,
the pace of the decline has been faster than in the fall of 2000 — the
only previous time the central bank has intervened in forex markets.
While Trichet declined to label recent foreign exchange moves of
the euro “brutal” late last month, he may well say that abrupt movements
are unwelcome, but he is unlikely to significantly intensify jawboning.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]
