PARIS (MNI) – Financial analysts agreed Thursday that the most
significant comments by ECB President Jean-Claude Trichet in his monthly
press conference were the ones pertaining to the central bank’s
liquidity operations and its government bond purchase program.

Trichet made clear that the ECB would continue providing banks in
need with unlimited liquidity until further notice. But he seemed
unphased by the increase in money market rates that followed last week’s
expiration of a E442 billion 1-year LTRO.

It was up to banks to decide how much of that amount to roll over
in 3-month and 6-day refinancing operations, Trichet noted, suggesting
he was not dissatisfied with the draining of a net E199 billion and its
concomitant impact on market rates.

Trichet also noted some improvement in the secondary market for
government bonds since the ECB started purchasing sovereign debt on May
10. He said the need for such purchases appeared to be “progressively
diminishing.” This led many analysts to wonder whether the central bank
would wind down the program despite the potential for more disturbances
in bond markets.

Excerpts of analysts’ comments are below:

DAVID PAGE, Investec: There were several questions on the open
market operations. Trichet seemed to be happy to abdicate responsibility
of overnight or short-term rates on the basis that banks demand the
amount of liquidity they take from the ECB and that it is that liquidity
that determines the overall level of the overnight rate. We are slightly
curious that the ECB should be happy with this application and we see it
as a potential problem going further forward but that seems to be
Trichets position for now…[On stress tests] Trichet was certainly not
giving anything extra away today. But we tend to share his hope that
transparency has its virtues and that net effect of the stress test will
be positive for the Eurozone. He casually observed that there seemed to
be some secondary [sovereign debt] market improvement which seems to
suggest that the ECB may well be continue to taper its government bond
purchases over the coming weeks but that was in a non-committal manner.

JUERGEN MICHELS, Citibank: Mr. Trichets comments suggest that so
far the reduction in liquidity and the increase in money markets is not
a big surprise to the ECB. Therefore, in contrast to our earlier view,
near-term action by the ECB to provide extra liquidity to the market,
i.e. a 6M LTRO with full allotment, is very unlikely. Hence, unless
there is a more significant increase in market rates which is possible
the ECB is likely to tolerate the tightening in monetary conditions
through an increase of money market rates. Mr Trichet did not give
details on the ECBs Securities Market Program (SMP). However, he said
that the Council had the feeling the need for the interventions has
been progressively diminishing. This suggests that unless there is a
renewed stress, an increase of asset purchases in recent weeks 4bn
per week is unlikely.

MICHAEL SCHUBERT, Commerzbank: I think the most important message
was Trichet said that one should not interpret the somewhat higher money
market rates as a policy signal. On the one hand Trichet accepts
somewhat higher money market rates, but obviously he sees this as a type
of normalization, so there is less excess liquidity in marktes. Not as
much money is needed for precautionary reasons, this means market rates
go up for a little bit, but the ECB does not want to stop the very
expansionary stance of monetary policy. It sticks to full allotment and
as long as it sticks to this then there is no change in the overall
assessment.

CHRISTEL ARANDA-HASSEL, Credit Suisse: The interesting bit is that
Trichet didn’t sound too surprised or worried, quite frankly, about the
interbank market and about the interbank rate going up. He did the
calculations like we all have done and said ‘well, you know, it’s about
243bln that have been drained, but we are providing unlimited funding’.
To a certain extent they are not driving the rates higher — I think
that’s a misconception, I am very sure that they are quite pleased that
the interbank market is not needing too much hand-holding. He sounded
quite relaxed, that’s good news in their book. I don’t think EONIA or
Euribor will continue to keep going up and up and up, as Trichet
reminded us, we have continued unlimited funding in place until the end
of this year.

TORGE MIDDENDORF, West LB: Actually not much news today with
regards to monetary policy. I think the ECB will stay on hold for a
very long time. There won’t be a move in the foreseeable future at least
with their main refi rate. With regard to liquidity measures, it was
interesting to note that Trichet said that it was up to the banks to
decide about their liquidity levels and that the decline in excess
liquidity over the last couple of weeks was a result of bank decisions.
So, it seems like the ECB is not acting against increases in money
market rates that we have seen.

RAINER SARTORIS, HSBC Trinkaus: To be honest, there was not really
any new information from this press conference. We still expect that the
ECB will not hike rates at all next year. They would still like to exit
the special measures [that are supporting] the economy and the banking
sector, giving unlimited liquidity to the system, buying government
bonds, etc. At least concerning unlimited liquidity, there is no sign
that they are going to stop this and we expect this program to last
until the first half of next year. Regarding government bonds, they will
continue to do this, but Trichet mentioned that there are some signs
that the secondary markets are improving, so they are trying to prepare
the market for an exit in the future, but we do not think this will
happen soon.

KEN WATTRET, BNP-Paribas: He sounded more confident about growth
and, on the basis of the news for Q2, that’s justified. My concern would
be what happens after Q2. I think it’s perfectly viable for the ECB to
talk up a strong Q2, but the leading indicators are softening and we
didn’t hear much mention of that…The comments about the scaling back
of bond purchases looking like a trend [is] a further indication that
the ECB intends to scale back the SMP and that worries me. I think on
the basis of what’s happening in the banking sector, what’s happening
with fiscal policy, it wouldn’t surprise me at all if we had another
wave of problems in the economy and more stress in the banking sector
and I think the ECB should be more open-minded to doing more in an
unconventional sense instead of backing away from it.

BEN MAY, Capital Economics: He didn’t give very much away. We’re
not going to find out any more about the stress tests from the ECB and
will have to wait until late July…Bond [purchases] have fallen-off but
there’s certainly a chance they’ll have to start again. There’s a lot of
uncertainty going forward.

CARL HAMMER, SEK: Rates are appropriate and on hold. Slowly rising
money market rates ahead are still expected. The current exit strategy
remains in place: cautiously scaling down previous liquidity injections.
On September 30, three ECB LTROs will expire. It is likely that the
current funding problems will persist beyond 2010 and hence, in
September the ECB may need to [announce that it will] offer the three 3m
LTROs scheduled for 4Q-10 also with a full allotment and delay
transition to variable rates until 2011.

JULIAN CALLOW, Barclays: Trichet was trying to combat a little bit
some of the pessimism that might have been developing in markets. The
meeting was most likely heavily focused on the banking sector. This
suggests a quiet confidence that the stress tests will not be too
negative for the euro area. It did seem to be a little bit more upbeat.

CEDRIC THELLIER, Natixis: While GDP growth and inflation prospects
suggest a long-lasting status quo on the main ECB refi rate at 1%,
financial developments (sovereign debt, banking sector) would hinder and
delay exit strategy from non-standard measures and probably conventional
monetary policy too. Indeed, we favour a scenario with a first rate hike
not occurring before Q3 2011.

–Paris newsroom, +331-42-71-55-40; paris@marketnews.com

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