The ECB may raise interest rates before fully withdrawing extra liquidity when the time comes to start an exit strategy.
Talking to an ECB Watchers conference (give me a break), Trichet said “Now is not the time to exit. But I would like to make it clear that the ECB has an exit strategy, and we stand ready to put it into action when the appropriate time comes.”
Trichet said the cornerstones of the ECB’s exit strategy included a link to its monetary policy strategy, which meant that any non-standard measures putting pressure on inflation would be unwound immediately, whereas non-inflationary measures could be kept in place for as long as needed.
Trichet said “The framework permits shorter-term interest rates to be changed while keeping some non-standard measures in place, should continued credit support be needed” adding “This feature is of great consequence; it means that the Governing Council can choose the way in which interest rate action could be combined with the unwinding of the non-standard measures. There is no pre-determined sequence between a change in interest rates and unwinding of non-standard measures.”
Riveting.
