BRUSSELS (MNI) – The European Central Bank will continue until
further notice to supply unlimited liquidity to Eurozone banks that need
it, ECB President Jean-Claude Trichet said on Thursday.

“We have already decided to continue to proceed with the 3-month
(refinancing) operation in an unlimited supply of liquidity mode for a
number of months, and we did not decide anything more than that,”
Trichet told reporters at his monthly press conference following the
ECB’s July monetary policy meeting.

To ease liquidity tensions in the 16-country currency club and
kick-start lending, the ECB launched in late 2008 a range of refinancing
operations that the region’s banks could tap.

They started to unwind them late last year. But in May, when the
sovereign debt crisis began to have dangerous ripple effects in other
markets around the globe, the ECB reinstated some of the fixed-rate,
unlimited allotment operations it had discontinued.

“We are still in the mode as you know of unlimited supply of
liquidity,” Trichet said at his monthly press conference following the
ECB’s July meeting.

But he said banks required less liquidity now than they had
previously.

On July 1, the ECB’s E442 billion 12-month refinancing operation
expired and the day before, the central bank’s three-month refinancing
operation received fewer bids than were expected, at E131.9 billion,
compared with expectations of more than E200 billion.

Between that 3-month operation and a 6-day operation the next day
in which banks took E111 billion worth of liquidity, a total of E243
billion were rolled over from the expiring 1-year LTRO and the rest —
E199 billion — was drained from the system.

Overall, “it was an enormous withdrawal of liquidity, but [I was
pleased with] the last operation, even in the context of enormous
liquidity withdrawal,” Trichet said.

He said that while a significant volume of cash was siphoned off,
thus putting upward pressure on short-term market rates, it should not
be read as any kind of monetary policy signal. Banks, not the ECB,
decided how much liquidity would be left in the system since they were
free to borrow as much cash as they wanted, Trichet noted.

“All the supply of liquidity I have mentioned was unlimited, so
they could have taken exactly the amount of liquidity they would have
asked for,” he said.

At its meeting Thursday, the ECB left its key refinancing rate
unchanged at 1.0%, where it has been since a 25-point cut that was
decided at the Council’s May 7, 2009 meeting.

The ECB left the deposit rate — which is the floor for euro money
market rates — at 0.25%, and the marginal lending rate — which is the
ceiling — at 1.75%.

The next policy-making Governing Council meeting is scheduled for
August 5.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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