The European Central Bank’s message yesterday was pretty straightforward: expect its exit strategy to be implemented gradually from December, when the last offer of one-year liquidity will be held. But one remark of Jean-Claude Trichet, ECB president, was curious. “We are satisfied with the present functioning of the market,” he said in his press conference. Did this mean the Bank was not planning to impose a rate surcharge on December’s one-year liquidity offer?
Possibly. Some might see a higher interest rate as a signal of tightening monetary policy. But markets currently expect an ECB rate hike in the third quarter of next year, so setting the interest rate on one-year liquidity offered next month at the current policy rate could be seen as a loosening.
The ECB could easily send out the wrong signal, then, whether it raises rates or leaves them be. My best guess is that Mr Trichet did not really intend his comment to refer at all to December’s operation, and that a decision about the terms of that offer are not yet decided. In that case, perhaps some form of indexing would be best, so the interest rate charged for the one-year liquidity would rise if the ECB did decide to increase its main policy rate in 2010.
Tags: ECB, one-year liquidity

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