–Adds market reaction, comments on market confidence and stress tests

LONDON (MNI) – The rise in EONIA is not an issue of concern for the
European Central Bank but rather is a sign that the interbank liquidity
situation is normalising, European Central Bank President Jean-Claude
Trichet said today.

Speaking at a press conference following the ECB’s monthly
Governing Council meeting, Trichet said the rise in short-term market
interest rates, due to a lower volume of outstanding liquidity in the
banking system, is not a signal of the central bank’s intentions on
official interest rates.

He also said the bank stress tests published late last month were
“impressive” and that they showed the resilience of the European banking
system.

“We are very happy that the stress tests have been a success. That
being said, it is clear that…because of the less dynamic [bank] demand
for the liquidity, we are in the situation [in which] it is normal to
view some augmentation of EONIA,” the ECB chief said. “So, we see that
as part of a situation that is normalizing.”

However, he made clear the increase was not engineered by the ECB,
and suggested the central bank was neutral about it.

“No, I don’t welcome it,” Trichet said. With regard to the bank’s
monetary policy, he said: “I don’t comment on future rates. We consider
the present monetary rate as appropriate. We have no signalling of rates
as I am speaking.”

Trichet also said the market is “functioning a little bit better,”
noting that money market volume had more than doubled. “It is not a
normal situation yet. But it goes in a good direction,” he said.

Trichet’s comment about normalization in the interbank market
provoked a 5bp flattening in the bund 2- 10-year yield spread to
+182bps.

“As for the future [liquidity] decisions, the rendezvous is for the
next meeting. We will take all decisions as appropriate,” Trichet said.

The ECB chief also said it would be a mistake to see a de facto
tightening of monetary conditions in the rise in EONIA and the recent
strong recovery of the euro. In fact, he said, it may be “exactly the
contrary,” given the narrowing of many spreads and the return of market
confidence. But he stressed that it was too early to “declare victory.”

The outcome the stress test results and their reception by the
markets has vindicated the ECB’s judgment that the tests should be
transparent, but the improved market sentiment is also due to other
factors, including the ongoing fiscal consolidation in some euro zone
states, Trichet said.

“I think the success of the stress tests…has demonstrated that
the [ECB] Governing Council was wise in recommending stress test
publication in individual banks — as much transparency as possible,” he
said.

However, “we are in an environment that is incorporating a lot of
other factors in addition to the stress tests: elements of the real
economy that are better, decisions taken by a number of countries to go
in the right way in terms of fiscal retrenchment…it is this complex
set of information that has been captured by the market and [taken] it
back to normal,” Trichet said.

The ECB chief was also pressed on the fact that today he described
the Eurozone economic outlook as surrounded by “uncertainty,” rather
than “high uncertainty” — the somewhat stronger formulation he had
used in previous press conferences.

“We are considering that we are in an environment of uncertainty.
We should not be complacent in any respect,” he replied. “We consider
that both the second quarter and the third quarter are probably better
than anticipated. But we will not consider that we can declare victory.
It remains uncertain. It remains uneven.”

He continued: “We remain in a situation that probably the second
semester will be less buoyant than the second quarter… Let’s remain
prudent and cautious. Let’s do all that we can to maintain confidence,
to remain an anchor for confidence. We will continue to do that. Be that
anchor of confidence when necessary.”

Trichet refused to give any answer to a question on the strength of
the euro exchange rate, saying only that he had “no particular message”
at the moment.

The ECB chief said it would be ‘premature’ to draw any conclusions
from the fact that the U.S. suddenly seems to be struggling economically
while the European economy has more bounce than had been anticipated.

“The reality is the reality. We have to look at the facts and
figures,” he said. “We are now observing a swing in the other direction.
We were happy to see better figures [in Europe], but it would be very
premature to draw negative conclusions about the US economy.”

Trichet said that there was no need to make any change to the ECB’s
last set of projections despite the better-than-expected recent data.

“I wouldn’t change in any respect the projections that we made last
time,” he said. “We have a new rendezvous which is the normal
rendezvous, and we will see what our new projections [are], but again I
would warn against drawing too hasty conclusions from what we have
observed.”

He added: “We had a very good Q2, I trust, and a Q3 better than
anticipated, I will stick to that at this stage”.

During the press conference, Trichet reiterated repeatedly that
rates are appropriate but insisted that the ECB had shown in the past
that it would take whatever action needed to secure price stability.

“We consider that the present rates are appropriate. That being
said, we will always do what is necessary to deliver price stability and
be credible in delivering price stability,” he said.

“We took decisions in 2004, 2005 that infuriated a number of our
own counterparts. At the moment, I am speaking, we consider 1% as
appropriate. And we will always do what is necessary for price
stability. And we have proved that.”

–London newsroom: 0044-207-634-1624: email: dthomas@marketnews.com

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