Trichet Says ECB May Not Raise Rates During Exit
European Central Bank President Jean-Claude Trichet said the bank won’t necessarily raise interest rates when the time comes for it to start withdrawing other emergency stimulus measures.
“The term ‘exit strategy’ should be understood as the framework and set of principles guiding our approach to unwinding the various non-standard measures,” Trichet said at an event in Frankfurt today. “It does not include considerations about interest policy.”
The comments suggest the ECB is prepared to leave its benchmark rate at a record low of 1 percent for an extended period to nurture an economic recovery in the euro region. Trichet also said the ECB would only scale back its emergency lending to banks when credit starts to flow normally through the economy and inflation risks emerge.
Trichet is trying to ensure that when the ECB starts unwinding some of its non-conventional measures next year, investors don’t interpret that as a signal rate increases are imminent, said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “The last thing they need right now is an expectation of a rate increase, with a very high risk that the current economic momentum may tail off by next spring,” he said.
Fed’s Exit Signal
The U.S. Federal Reserve signaled in minutes published Sept. 2 that it’s already trying to prepare investors for an end to some of its asset purchases. The ECB has focused on lubricating bank lending in an effort to rekindle growth in Europe. It is offering banks as much cash as they want at its benchmark rate for terms of up to a year.
“From today’s perspective, the need for enhanced credit support remains,” Trichet said. “Notwithstanding some recent signs of improvement in the economic outlook, it is premature to declare the financial crisis over. Stressing the importance of the exit strategy should not be confused with its implementation.”
Trichet used today’s speech to outline how the ECB’s stimulus measures will be withdrawn when the time comes. Many of the measures will “naturally unwind over time” as existing loans mature and demand for additional cash wanes, he said. The ECB can also use fine-tuning operations to absorb excess liquidity if needed, he added.
Inflation Risks
“One scenario would be that problems in money markets disappear before any upside risks to price stability emerge,” ECB Executive Board member Juergen Stark said at the same conference today free business cards. “This means that the non-standard measures would be withdrawn before rates are raised, and the withdrawal of the measures would not be expected to have much impact.”
If inflation risks emerge before problems in money markets dissipate, the ECB “may have to maintain parts of the enhanced credit support while rates are raised,” Stark said.
The economy of the 16-nation euro region probably expanded this quarter, bringing an end to its worst recession since World War II. It contracted just 0.1 percent in the second quarter after Germany and France, the two largest economies in the region, unexpectedly returned to growth.
The ECB yesterday raised its economic forecasts for the euro region to predict growth of about 0.2 percent in 2010 instead of a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago.
G-20 Talks
Still, rising unemployment and the expiry of government stimulus packages may damp economic growth next year. Trichet flies to London today to discuss the global response to the financial crisis with officials from the Group of 20 nations.
International Monetary Fund Managing Director Dominique Strauss-Kahn said today there’s a “real danger” policy makers will withdraw support measures for their economies too soon, jeopardizing the global recovery from recession.
“Given the fragility of the recovery, there are risks that it could stall,” Strauss-Kahn said in a speech in Berlin. “Premature exit from accommodative monetary and fiscal policies is a principal concern.”
Speaking at the same conference, ECB council member Axel Weber said there will “in all likelihood be further tests and a bumpy road ahead.” While world leaders should discuss strategies for unwinding emergency policies, “the time is definitely not right to embark on taking such measures,” he said.
The ECB won’t raise interest rates before the third quarter of next year, a Bloomberg News survey of economists shows.