The European Central Bank today announced its first steps to unwind some of the extraordinary measures it took to prop up the euro zone economy during the global crisis.
Speaking after the ECB kept rates at a record low of 1 per cent as expected, ECB President Jean-Claude laid out a number of decisions on ending and tightening up the measures it has taken to support liquidity in the banking sector.
With markets still some way from normality, most analysts had predicted the bank would stay on hold. But the bank's moves on the liquidity steps sent the euro and euro zone bonds lower.
Mr Trichet said the ECB had decided to hold its last six months refinancing operation on March 31st and confirmed it would make this month's 12-month tender its last. This time the interest rate on the one-year loans, which have up to now been offered at just 1 per cent, would be linked to any changes in shorter-term rates.
"The improved conditions on financial markets have indicated that not all of our measures are needed to the same extent as in the past," Mr Trichet said.
He also announced new forecasts by European Central Bank staff which upped their expectations for euro zone growth next year after the euro zone emerged from recession in the third quarter. However, the mid-point of their forecast range for 2011 inflation was still well below the bank's 2 per cent ceiling.
The moves bring an end to more than a year of intensive ECB policy easing and herald a change of direction.
But policymakers will probably want to avoid pushing for a rapid exit at this stage with countries including Spain still in the grip of recession, unemployment set to rise further and an already-strong euro threatening to sap the fledgling recovery.
Some central banks such as Australia's and Norway's have already begun to raise rates. But the U.S. Federal Reserve has stuck to its commitment to ultra-low interest rates while taking some small steps to wind down its emergency support.
At the far end of the scale, the Bank of Japan this week offered to pump more funds at banks to lower longer-term money market rates. Mr Trichet said today staff saw inflation in a range of 0.8 to 2.0 per cent in 2011, the crucial period for today's monetary policy decisions given the long lead time and implying little need for rapid interest rate rises.
Staff revised up forecasts for growth in 2010 to between 1.1 per cent and 1.5 per cent, from between -0.5 and +0.9 per cent in September forecasts.
ECB staff also upgraded their projections for this year, and said they expected gross domestic product (GDP) to fall between 3.9 and 4.1 per cent in 2009, a slightly smaller contraction than the 4.4 to 3.8 per cent range given in September.
"Some of the factors supporting the recovery at present are of a temporary nature," Mr Trichet said.
"The Governing Council expects the euro area economy to grow at a moderate pace in 2010, recognizing that the recovery process is likely to be uneven and that the outlook remains subject to high uncertainty." Inflation remains subdued after months of falling prices and the bank is not expected to start to raise interest rates before the end of next year.
ECB staff inflation projections were edged up but inflation next year was seen remaining well under the ECB's target of below, but close to 2 per cent. The staff projections put 2010 inflation between 0.9 and 1.7 per cent, from 0.8 and 1.6 per cent in September.
Reuters