–Rates On Hold, Cash Plentiful As ECB Worries About U.S., EMU Periphery

PARIS (MNI) – The ECB’s extension of emergency liquidity measures
and its upward revision to growth forecasts were completely as expected
and provided no guidance on future other policy other than to confirm
that the status quo will remain for a long time to come, analysts said.

The prevailing view was that while Trichet said the ECB is in the
process of withdrawing surplus liquidity, in fact it is still worried
about the U.S. economy and developments in the Eurozone’s periphery.

Rates are on hold for the foreseeable future, and it’s still
unclear exactly when the ECB will begin to wind down its crisis-induced
cash operations in earnest.

Below are excerpts from analysts’ comments:

HOWARD ARCHER, IHS Global Insight: The ECB behaved exactly as
expected at its September policy meeting, keeping interest rates down at
1.00% and also announcing that it is extending its unlimited liquidity
measures to banks through the rest of 2010. Indeed, the ECB continues
to give the impression that interest rates are going nowhere for some
considerable time to come. The odds still heavily favour the ECB keeping
interest rates at 1.00% through 2010 and very deep into 2011. Despite
the 1.0% quarter-on-quarter spike up in GDP in the second quarter, the
ECB is very aware that the Eurozone’s economy will be buffeted over the
coming months by tighter fiscal policy increasingly kicking in across
the region and likely slower global growth. Furthermore, sovereign debt
problems in the Eurozone could well flare up again.

RALF UMLAUF, Helaba: As expected, the ECB is sticking to its
wait-and-see stance. It has neither sent out signals for an early
interest rate change nor for a further widening of its liquidity supply,
in other words, one can expect that for the foreseeable future the ECB
will stick to its current monetary policy stance. Trichet has, though,
stressed somewhat stronger than four weeks ago that there still exist
worries about the economy.

JONATHAN LOYNES, Capital Economics: The growth forecasts were
probably a little more up-beat than they might have been. I mean, the
ECB, up until now has been very cautious about the recovery and I think
Trichet said only last month that he was happy with the most recent
staff economic forecasts and yet that’s now been revised to a central
rate of 1.6% , so that in part is just a mechanical response to the
stronger-than-expected output in the second quarter and seems to be
sounding a little more positive about the underlying economic recovery.
Last month they were calling the recovery moderate and uneven. It is
more upbeat, but obviously counterbalanced by further insistence that
there’s lots of risks and a strong sense that they need to maintain
their support for the banking system.

ARND SCHAEFER, West LB: In our view we see no real surprise [from
Trichet's statement], what we expected was the open market operation
with full allotment until next year and that is what we see. There was a
very small surprise concerning the creation of the three-month operation
because now they are indexed like the former 6- and 12-month tenders,
but Trichet was asked about this and said it was just a technical thing,
so there is no interest rate signal. Since he did not try to defend
himself by saying that he never pre-commits, this is a hint that the
decision is only technical and not a rate signal.

CARSTEN BRZESKI, ING: “While the ECB’s macro assessment did not
bring any surprises and can be summarised as a gradual sub-potential
recovery without risks to price stability, the ECB presented the
official postponement of its liquidity exit…Today’s meeting and
particularly the decision on the liquidity programme shows that the ECB
still does not trust the recovery and the health of the financial
system. The attempt to enter the exit lane has once again been
postponed.

MARIO GRUPPE, Norddeutsche Landesbank: As expected, Trichet’s press
conference was relatively unspectacular today. They decided today what
[ECB Governing Council member Axel] Weber already announced recently,
that the exit — the actual reduction of liquidity supply — will only
happen next year. Thereby, the ECB helps those banks, which are still in
not such a good shape, to manage the turn of the year which is typically
the moment where there arises a need for liquidity. Regarding its
interest rate policy the ECB has not sent any signal for changes. The
main interest rate will stay at 1% for the time being, which is no
surprise.

PHILIP SHAW, Investec: The maintenance of the enhanced credit
support programme running at least until January is no surprise at all.
The ECB also notched up its 2011 forecast as well. That was a pretty
modest change, nothing that significant. There wasn’t a huge amount for
markets to digest. Because we are in troubled times now, its liquidity
support is more geared to the peripheral economies which are more in
trouble. That is plain to see when you look at which countries’ banks
are borrowing more from the ECB. Although Trichet said that money
markets are back to normal working, this might be true as a whole, but
it’s certainly not true if you are borrowing in Portugal or Greece and
therefore it would be wrong to take Trichet’s general comments on
liquidity operations and try to extrapolate a liquidity policy which is
clearly aimed at Greece, Spain, Portugal and Ireland.

MICHAEL SCHUBERT, Commerzbank: The press conference was 95% in line
with my expectations. Of course I thought the growth projections would
be revised upwards and the bank’s forecasts are very much in line with
ours. We expected full allotment into the 4th quarter; the only surprise
was regarding the index rate for the 3-month tender, but of course
Trichet emphasized very strongly that there was no intention to send a
rate signal. I think the ECB is keen to leave as many doors open as
possible. The bank does not want to rule out anything, it wants to be
open at least for the time being. There will be no rate change [soon],
it might be discussed next year but it of course depends on the state of
financial markets and the economy. According to our forecasts, there
will be no rate change for a protracted period.

JUERGEN MICHELS, Citigroup: In an environment of fragile financial
markets and ongoing strains in the banking sector, the ECB postponed the
withdrawal of non-standard measures to early 2011. In our view, the
switch from the previous fixed rate to an average policy rate for the 3M
LTRO is in order to reduce incentives for banks using the 3M LTRO in
December, helping to prevent big liquidity swings at the expiry of the
operation at the end of February. Furthermore, the ECB wants to assure
that a rate hike in 1Q — which is very unlikely — would not be
undermined by a large amount of outstanding liquidity. We expect the ECB
to end the full allotment for the 3M LTRO in January, but to continue
the full allotment for the MRO — probably for years — in order to deal
with a non-functioning interbank access of periphery country banks.
However, to us, a first small rate hike is likely in mid-2011, probably
3Q.

KEN WATTRET, BNP Paribas: The decision to roll forward the
fixed-rate, full-allotment procedure on all re-financing operations
until year-end was made only by consensus on the Governing Council; it
was not a unanimous decision, unlike that for policy rates. This clearly
points to some dissension, presumably by some of the more hawkish
members, though how widespread that is we do not know. Despite the
commitment above, the ECB remains ‘in the process of phasing out’ its
non-standard policy measures. Our concern remains that some on the
Governing Council are in too much of a hurry to normalise policy in what
is, and is likely to remain, a far from normal environment…It is
remarkable that the ECB is talking about upside risks to inflation
while, on the other side of the Atlantic, there is talk of the Fed
expanding its balance sheet given concerns about the economy losing
traction and increasing the risks of deflation.

KENNETH BROUX, Lloyds TSB Corporate Markets: I don’t think [the
press conference] was really eventful in all honesty. I think it was
well telegraphed in advanced. There were no surprises, no signals on
rates. The ECB’s committed to providing liquidity over the next quarter,
which was flagged by Mr. Weber. So, there seems to be broad sense of
agreement to carry on doing that until 2011. More upbeat on growth. But,
we knew that already. I took very little away as regards clues to new
policies or new rationale. It’s status quo until we get through this
year.

KLAUS SCHRUEFER, SEB: There were no surprises. Trichet sent a clear
signal that they have a low level of interest rates which will stay that
way for a very long time, I think at least until March 2012. There
remain a lot of uncertainties until then, looking at financial markets,
the interbank market, bank funding, etc. We see no change in policy in
the foreseeable future.

JULIAN CALLOW, Barclays: Today’s introductory statement and press
conference was broadly in line with our expectations, with the main
focus being on a still relatively upbeat tone from the Council
concerning the economic outlook, alongside details of the market
operations during the remainder of this year and into early 2011.

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