Some initial thoughts on todays European Central Bank policy announcement

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.


5 thoughts on “Some initial thoughts on todays European Central Bank policy announcement

  1. Kinda sounds to me he simply volleyed the hot potato back to the politicians with a small time extension attached.. and in all honesty, that is really where this belongs anyways. The lack of willpower to do something meaningful here in the States is unnerving.

  2. Hi – I agree that the baton is left with fiscal authorities on an ECB bridging loan. Dont quite understand the volatile reaction in the markets. I heard Mr Trichet at the webcast constantly place the ECB’s operations within the context of improving the transmission mechanism for monetary policy to achieve price stability. In fact, his repetition made me wonder whether some careful legal advice had been given on the subject.

    I did hear him say that he wouldnt discuss emergency liquidity assistance for Irish banks or any others and that all liquidity injections ( inc bond purchase operations) were being sterilised elsewhere to ensure price stability. I dont get the impression we are going to have Le Quantitativeeasing de l’Europe….matter of interest how exactly is the ECB draining liquidity from the system?

    • Hi Shire
      The Securities Markets Programme has laways been something of a half-way house in my view. It is not full QE but it is not fully sterilised either.

      I discussed it back in May which seems so long ago now!

      “In terms of sterilisation of the purchases whilst we got detail we also got a problem. The ECB announced that that it will sterilise its €16.5bn of bond purchases via the auction of one-week fixed-term deposits. Euro zone banks will be able to bid for the deposits, and they’ll be given to those that bid at the lowest yields. This seems clear enough but there is a sting in the tail as the ECB also announced that.

      Fixed term deposits held with the Eurosystem are eligible as collateral for the Eurosystem’s credit operations.

      You see the ECB is committed to regular tenders in its credit operations so in return for these deposits you have guessed it the banks can in effect reclaim liquidity as these LTROs have no limit. Oops.”
      LTROs are Long Term Refinancing Operations
      So in a way as a result of his moves today we are nudging a little towards QE again as we are back to LTROs with no limit again ( for an extra 3 months anyway). The exit strategy was reducing the ability for this.

  3. Shaun I was shocked at the figures for ‘international’ as well as private business lending by the FED. It certainly looks to be the world’s lender of last resort now. Like Germans will the Americans be willing to take such positions?

    • Hi Mac
      One of the virtues of freedom of information policies is that they shine light into previously dark corners. Even those who follow events did not expect the full scale and size of the interventions of the Federal Reserve in 2007/08. Also the extent of foreign lending must be an issue. However some care is needed here as for example most of Barclays borrowing would have been in fact due to its purchase of Lehman Bros.
      How quickly this will filter into the American consciousness is hard to predict but over time you have to feel it will have some impact. Perhaps the growth of the Tea Party is related to such fears. we will have to see.

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