By Johanna Treeck
FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet sounded more upbeat about the Eurozone’s prospects but stopped
short of declaring victory or announcing a second move towards the exit
from non-conventional policies.
After running the gauntlet in recent months on the Greece crisis,
the ECB’s controversial government bond purchases, and bank stress
tests, Trichet enjoyed an easy ride during Thursday’s press conference.
One journalist asked him about his holiday plans.
Even the pertinent questions failed to elicit significant insights
into the central bank’s policy plans ahead.
Trichet once again described current interest rates as
“appropriate” and reiterated that rising money market rates should not
be read as a monetary policy signal. He also opined that despite a rise
in interbank rates, and taking into account the return of confidence to
financial markets, overall conditions have not tightened.
Unsurprisingly, however, Trichet failed to endorse Governing
Council member Jozef Makuch’s assurance that “there is no reason for
speculation regarding the rate increase until 2011.”
Asked about liquidity provisions in the coming months, Trichet said
that the “the rendezvous is for the next meeting. We will take all
decisions as appropriate.” He gave no further guidance, though he
observed that “the volume in the overall money market has very
significantly augmented, I could say even doubled.” But he conceded that
the situation is not normal yet.
Thus far, the ECB has phased out full-allotment procedures for
operations in order of maturity, suggesting that it might extend that
method for weekly operations while remaining non-committal about 3-month
refis. That the banking system has increasingly weaned itself off of
ECB funding over the past weeks suggests no urgency to withdraw support
at a time that might still be premature for some banks.
Asked for a guidance on the future of the ECB’s controversial
government bond buys, Trichet only said that “it is not a surprise at
all that the level of activity of that particular program has been very
meager,” but he confirmed that it still “continues.”
On the economic outlook, Trichet painted a more optimistic picture,
but one tinged by caution. “The available economic data and survey-based
indicators suggest a strengthening in the economic activity in 2Q of
2010 and the available data for 3Q are better than expected,” he said.
“Taking into account a number of temporary factors”, however, the
Governing Council continues “to expect the euro area economy to grow at
a moderate and still uneven pace.”
The inflation outlook remains little changed, with some volatility
around the current price level expected in the coming months, Trichet
said. In 2011, inflation rates are expected to “remain moderate overall,
benefiting from low domestic price pressures.”
He struck a more sanguine note on the outlook for the financial
system. In addition to his upbeat comment on the improvement in
interbank lending, Trichet highlighted the positive effects of the
recently published European bank stress tests.
“The stress-testing exercise was comprehensive and rigorous and the
results confirm the resilience of EU and euro area banking systems as a
whole to severe economic and financial shocks,” he said. “In connection
with the enhanced transparency, this represents an important step
forward in restoring market confidence.”
Much as expected, Trichet dismissed concerns about the ongoing bank
loan tightening reflected in the 2Q bank lending survey, pointing out
that the survey had been conducted during the height of the sovereign
debt crisis and that credit developments remain in-line with historical
trends.
Trichet did not refrain from some scarcely concealed self-praise.
“If it appears ex post…that we could go through this difficult period
with the real economy not being dramatically influenced, which was the
working assumption of a large number of observers, perhaps part of the
credit can come to the central bank,” he said.
The ECB’s success may also be reflected in the recent sharp rise of
the euro, which has recovered about 10% against the US dollar in just
six weeks. This, however, may yet prove a double-edged sword,
undermining the Eurozone’s export-lead recovery at a time when austerity
measures will increasingly weigh on domestic demand. As is so often the
case, Trichet declined to comment on recent foreign exchange moves.
While the ECB may have been remarkably successful in crisis
management, some underlying causes of the crisis persist and with them
doubts about the euro’s future. Recent developments have shown a
widening gap both in terms of economic and financial market recovery
between the Eurozones core economies and the periphery. A
one-size-fits-all policy may thus become increasingly less tenable in
the future.
Trichet said that was “a challenge that we have permanently since
the very beginning of the euro.” In such an environment, it is
especially important for national authorities to “take their
responsibility,” he noted.
The recent crisis, however, has shown that far from complementing
ECB policies, the actions of national authorities can work against the
central bank’s objectives.
The political discord over the future structure of the Eurozone —
including debates on whether a permanent European Financial Stability
Facility should be linked to some orderly debt restructuring mechanism
— may be yet more disconcerting than the widening gap between Eurozone
economies. Markets are likely to jump at any perceived cracks in a
common cause, possibly reigniting the sovereign debt crisis.
While the ECB may have won the battle, Trichet is all too aware
that he and his colleagues might yet be confronted with more fallout
from infighting among political leaders and from markets betting that
they will fail. “We would certainly not consider that we declare
victory. The main message is we remain cautious,” Trichet said.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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