Weber Says ECB to Keep Full Allotment Longest in Main Operation
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By Jana Randow and Christian Vits
Dec. 9 (Bloomberg) -- European Central Bank Governing Council member Axel Weber said the ECB’s main refinancing operation will be the last tender to be switched from unlimited funding to its pre-crisis variable-rate allotment procedure.
The discontinuation of the ECB’s six-month and 12-month tenders “is an unwinding of an ultra-expansionary” liquidity policy, Weber told journalists in Frankfurt last night. “I wouldn’t call this a tightening. We neither wanted to send a restrictive nor an expansionary signal.”
The ECB decided on Dec. 3 to end long-term emergency loans and to tighten the terms of its final 12-month tender as financial markets recover from the worst crisis since the Great Depression. ECB President Jean-Claude Trichet said the move doesn’t signal the ECB intends to raise interest rates. Economists expect the Frankfurt-based central bank to increase borrowing costs in the third quarter of 2010, according to a Bloomberg News survey.
“Continuing non-standard liquidity provision would lead to a more expansionary monetary-policy stance as financial markets improve,” Weber said. “We’ve tried to neutralize this development.”
The changes announced by the ECB nevertheless pave the way for a return to normal refinancing operations, in which the interest rate on its loans is determined by market demand. After the collapse of Lehman Brothers Holdings Inc. in September last year made banks reluctant to lend to each other, the ECB said it would lend them as much cash as they wanted at its benchmark rate.
Financial Markets
The recovery of financial markets allows the ECB to “slowly and step-by-step” reduce the liquidity supply, Weber said. “We’ll have a process of an orderly unwinding.”
With last week’s announcement, the Eonia overnight rate, the interest European banks charge each other for overnight loans, will move from the deposit rate toward the main refinancing rate, Weber said. “But I don’t expect that this will be a fast process. Instead, it will be a very orderly move visible over time.”
The ECB last week decided to index the interest rate on its final tranche of 12-month loans to the benchmark rather than allotting funds at a fixed 1 percent. The risk for the ECB is that any indication it could raise rates sooner than the Federal Reserve may fuel further gains in the euro and undermine the region’s economic recovery.
The ECB also said it will discontinue its six-month loans after March and only guaranteed unlimited funding in its other refinancing operations until April 13.
Medium-Term Goal
The ECB raised its economic outlook, forecasting growth of 0.8 percent next year and 1.2 percent in 2011. Inflation is expected to average 1.3 percent next year and 1.4 percent in 2011, below the bank’s medium-term goal of just less than 2 percent.
“We currently don’t see any noteworthy inflation risks over the policy-relevant horizon,” Weber said. “We’d counter inflation risks resolutely if they arise.”
Weber said the spread between the main refinancing rate and the deposit rate, which was cut from 100 basis points to 75 basis points in May, “will have to be moved into the direction of normalcy with the first interest-rate step.”
To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Christian Vits in Frankfurt at cvits@bloomberg.net.
Last Updated: December 9, 2009 06:00 EST
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