October 7, 2010
By MATTHEW SALTMARSH and JULIA WERDIGIER
The European Central Bank signaled Thursday that it would stick to its policy of gradually removing extraordinary economic stimulus measures — even as other monetary authorities appeared to be moving in the opposite direction.
The comments, and the seeming lack of alarm from the European Central Bank president, Jean-Claude Trichet, about the euro’s recent appreciation, briefly pushed the currency above $1.40, the highest level against the dollar since late January.
The E.C.B. also left its benchmark interest rate unchanged at 1 percent. Earlier Thursday in London, the Bank of England kept its main rate at 0.5 percent and decided not to expand its debt-purchasing program for now.
The E.C.B. has been saying that it will gradually remove measures intended to provide added liquidity for struggling banks, but has not given a schedule. Speaking in Frankfurt, Mr. Trichet said there was still a “consensus” on the bank’s council that it should retain support for lenders having difficulty raising funds in interbank markets.
“There is absolutely no change in our own attitude,” he said. He noted that outstanding amounts of its refinancing operations had declined recently, reflecting a “progressive normalization” of money-market conditions.
The bank’s difficulty now is that troubled lenders primarily in small economies — like Ireland, Greece and Spain — are so fragile that they still require extraordinary financing from the central bank, while most lenders in the core economies of Germany and France are stronger. Mr. Trichet said that in countries that have major problems with bank financing — as in Ireland, where the government is debating whether to require bond holders to share the burden of the bailout of Anglo Irish Bank — it is up to the “appropriate decision makers” in those countries to resolve them, rather than the E.C.B.
Nick Kounis, an economist at ABN Amro in Amsterdam, said, “This suggests that the E.C.B. does not want to keep on extending its full allotment policy for a relatively small part of the euro-zone banking sector that needed it.”
As the E.C.B. moves in one direction, other central banks are going in another. The Bank of Japan opted for a further round of stimulus Tuesday, and some economists said that the Bank of England might follow this year. The are also strong signals that the U.S. Federal Reserve will resume buying huge amounts of government debt to help the economy.
Mr. Trichet did not echo recent comments from finance officials elsewhere that the world may be on the verge of a currency war — as the authorities in East Asia and other emerging countries continue to intervene to dampen the value of their currencies. “I think that exchange rates should reflect economic fundamentals, that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” he said.
Analysts said the comments suggested that the E.C.B. was not overly concerned about the rebound in the euro, for now.
The E.C.B., which sets monetary policy for the 16 countries in the euro zone, has kept its benchmark interest rate at 1 percent since May 2009. Most analysts do not expect the E.C.B. to raise rates until well into 2011.
There have been signs in the past week that more banks have been able to borrow the money they need on open markets, rather than relying on the E.C.B. But at the same time, the E.C.B. last week stepped up its purchases of European government bonds, a sign that the sovereign debt crisis is still simmering.
Mr. Trichet continued to present a balanced view on growth prospects. “Recent economic data are consistent with our expectation that the recovery should proceed at a moderate pace in the second half of this year, with the underlying momentum remaining positive,” he said, adding that “private sector domestic demand should gradually strengthen further.”
In Britain, there have been signs that some policy makers would consider a new round of debt purchases to revive an economic recovery that has lost steam.
Support for expanding the debt purchasing program, also called quantitative easing, indicates a change of tone at the central bank from previously worrying more about relatively high inflation than economic growth.
During a speech last month, the Bank of England policy maker Adam Posen made a case for considering more quantitative easing, a sign that fears the economy could deteriorate again gained pace. Such debt purchases are intended to revive the credit markets and add liquidity to the economy,
Many economists expected that support for expanding the program to buy mainly government debt, which was halted at £200 billion, or $317 billion, almost a year ago, would gain momentum from the committee meeting at the bank this week.
The Bank of England made no statement after its meeting Thursday. It is to publish the minutes of the meeting later this month.
After gaining some momentum earlier this year, Britain’s economic recovery started to slow again in the past quarter and consumer confidence ebbed amid concern about upcoming government spending cuts. Consumer confidence fell more than economists expected in September, and claims for jobless assistance increased more than expected in August, the first rise in seven months.
The British chancellor of the Exchequer, George Osborne, said at a party conference Monday that postponing spending cuts and tax increases was not an option.
He warned that any delay in cutting Britain’s record deficit would lead to higher costs to service the country’s debt and ultimately higher interest rates. The government is due to detail its plans to cut the budget deficit in two weeks.
Matthew Saltmarsh reported from Paris and Julia Werdigier from London. Jack Ewing contributed reporting from Frankfurt.
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