European Central Bank President Jean-Claude Trichet signaled the bank intends to stick to its exit strategy even after the Federal Reserve eased policy further, sending the euro to a 10-month high, and tensions on Europe’s bond markets increased.
Policy makers will decide on possible further exit steps next month, Trichet said at a press conference in Frankfurt today after the ECB left its benchmark interest rate at a record low of 1 percent. “The non-standard measures are by definition temporary in nature,” he said.
The ECB’s removal of emergency stimulus is being complicated by renewed concerns about the fiscal health of countries like Ireland, Portugal and Greece, and by the Fed’s move to buy another $600 billion of Treasuries to prop up the U.S. economy. Widening bond spreads and an appreciating euro may undermine the Europe’s economic recovery.
“One would never know that the Fed had just last night embarked upon a radical new stimulus strategy, based on the ECB’s statement and the answers given,” said Julian Callow, chief European economist at Barclays Capital in London. The ECB’s comments suggest “that the Governing Council is still minded to plough its own furrow going forward.”
The Fed’s stimulus program, aimed at stamping out deflation risks in the world’s largest economy, sent the euro as high as $1.4283 today. The single currency has increased 19 percent against the dollar since early June and traded at $1.4226 at 5:33 p.m. in Frankfurt.
Trichet said he has “no reason to think” that the Fed, the U.S. Treasury and President Barack Obama are “playing a tactic of a weak dollar.”
The ECB’s tightening bias sets it apart from the world’s other major central banks. The Bank of England today left its key rate at 0.5 percent and maintained its asset-purchase program at 200 billion pounds ($325 billion). The Bank of Japan may announce further asset purchases of its own at noon in Tokyo tomorrow.
The euro-area economy is showing signs of weakening after expanding at the fastest pace in four years in the second quarter. Expansion in the manufacturing industry has slowed from a peak in April and unemployment climbed to a 12-year high of 10.1 percent in September. Exports from Germany, Europe’s largest economy, declined for a second month in August.
“The underlying momentum of the recovery remains positive,” Trichet said. Inflation pressures will “remain contained” though risks are “slightly tilted to the upside,” he added.
ECB policy makers from Germany, Luxembourg, Belgium, Austria, Italy and the Netherlands have warned against keeping interest rates too low for too long, and some have said further exit steps may be taken in the first quarter of next year.
The ECB has committed to provide banks with unlimited liquidity in its weekly, monthly and three-month refinancing operations until the end of the year after abandoning its six-and 12-month loans. Next month, policy makers may decide whether to return to a bidding process in at least some of the lending procedures.
Bundesbank President Axel Weber has also called for an end to the bank’s bond purchases, arguing its risks outweigh any benefits. The ECB today bought 10-year Irish government bonds, according to three traders with knowledge of the transactions. In the three weeks ending Oct. 29, no purchases were completed, according to weekly ECB notices.
The program is “not over,” Trichet said, adding that the ECB only reports purchases after they settled. “You will see that the program exists.”
So far, the ECB has settled purchases worth 63.5 billion euros ($90 billion). It sterilizes their impact on money supply by absorbing the same amount of liquidity from banks.
Investors have continued to dump Irish, Portuguese and Greek government debt after German Chancellor Angela Merkel stepped up her push to make bondholders share the burden of any future bailout of a euro nation.
Irish 10-year securities fell for an eighth day, the longest streak in two years, pushing the yield premium over German bunds to a record of 525 basis points. Portugal’s spread widened to 409 basis points and Greece’s reached 856 basis points.
Trichet said that investors in Irish bonds may be calmed by new forecasts from the government today. Irish Finance Minister Brian Lenihan said he plans to slash the budget deficit by 6 billion euros in 2011.
“I have no reason to think that observers will be disappointed,” Trichet said before the announcement was made.