As today was a significant announcement by the ECB as we are in the midst of something of a storm in the markets and finances of several of the Euro zone countries I thought that I would make an initial update on it. Listening and watching to the Press Conference I have to say I am not sure that the President of the ECB is sending the correct message by crowing about an average inflation rate of 1.97% during its lifetime as today is not the day for that. It would also help if he actually answered the questions asked which he rarely does. Having mentioned in the past that the “other assets” section of the Irish Central Bank’s balance sheet had risen by some 20 billion Euros I did notice that he did not answer a question on this subject.
If we move on to what the ECB is going to do then let me quote from their press release.
The Governing Council today also decided to continue conducting its main refinancing operations (MROs) and the special-term refinancing operations with a maturity of one maintenance period as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the third maintenance period of 2011 on 12 April 2011.
Furthermore, the Governing Council decided to conduct the three-month longer-term refinancing operations (LTROs) to be allotted on 26 January, 23 February and 30 March 2011 as fixed rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO.
What does this actually mean?
The ECB had been planning a wind down of its extraordinary monetary measures and it was soon to happen and was called its exit strategy. Well in a nutshell this has been delayed by 3 months. This is a response to the current crisis.
What about further government bond buying?
Here the press release told us nothing. We can be sure therefore that we will not be seeing anything like what has been tried in the UK and US in terms of asset purchases or QE for now. However the lack of further information on the Securities Markets Programme and the statement that it is supported by the “overwhelming majority” i.e not everyone on the Governing Council leaves its position very opaque.
This position got even more opaque as the ECB was seen buying in the Portuguese and Irish government bond markets whilst the press conference was taking place.
I feel that the ECB has done the minimum it feels it can get away with and I wonder if the announcement and the press conference was for our benefit at all. It had the feeling that Mr.Trichet was talking to Europe’s leaders and suggesting that the next move is theirs and that in effect central bankers and politicians are playing a game of chess or perhaps just a game. Unfortunately recently they have not been playing it very well.
He perhaps threw them a fish in figurative terms and will expect some response in terms of fiscal discipline or debt restructuring. We will have to see how this develops and it may take some time. Things usually do in the Euro zone.