ECB unswayed by Fed bond move
Thursday, November 4, 2010; 12:18 PM
BERLIN -- The European Central Bank stood its ground Thursday and refused to be swayed by the Federal Reserve's decision to launch a bond-buying program to create new dollars and shore up the U.S. economic recovery.
The ECB, as expected, left its benchmark refinancing rate at a record-low 1 percent for the 18th straight month. It appeared to remain on track to unwinding its own post-crisis programs even though unemployment across the 16 countries that use the euro is 10.1 percent - higher than the U.S. rate.
High unemployment and tepid growth are reasons the Fed has decided to ease monetary policy further. While the Fed is pumping more money into the U.S. economy partly to get growth higher and unemployment heading downwards, the ECB is pursuing a seemingly opposite path.
Its president, Jean-Claude Trichet, gave no new details on the future of its crisis lending measures but indicated that the ECB will give an update next month.
He underlined his longstanding insistence that the ECB's measures - such as providing unlimited liquidity to banks and buying government bonds - "are by definition of a transitory nature."
The main reasons behind the ECB's stance are that inflation - at 1.9 percent - is at its target of "close to, but below 2 percent" and economic growth has outstripped much more gloomy predictions earlier this year when the Greek debt crisis was in full swing.
Still, the eurozone faces a number of problems, hence Trichet's insistence Thursday that the risks to the "economic outlook are still slightly tilted to the downside, with uncertainty prevailing."
There were plenty of reminders Thursday that the problems that led to the bailout of Greece and serious questions over the future of the euro currency itself haven't disappeared.
Ireland is at the epicenter of investors' concerns at the moment as the government prepares to introduce another dose of austerity - more spending cuts and tax increases - to get its public finances into shape.
Meanwhile, the euro rose to a new 9 1/2-month high, to the likely concern of exporters. And Trichet aired his concerns that planned reforms to the rules underpinning the euro don't go far enough.
The backdrop to Thursday's ECB meeting was the Fed's confirmation Wednesday that it will buy $600 billion of long-term government bonds by mid-2011 in an attempt to further drive down rates on mortgages and other debt in the hope of getting lending higher.
That will be in addition to an expected $250 billion to $300 billion in purchases over the same period from reinvesting proceeds from the Fed's mortgage portfolio.
Trichet turned aside questions about the Fed's action, noting that the two central banks have different mandates. While the ECB has an inflation target, the Fed has a broader mandate that emphasizes both controlling inflation and monitoring growth levels.
"We have our responsibility, we have our mandate," Trichet said. "We have delivered price stability for 330 million citizens."
Trichet said he had "no further comments on what is done by other central banks that have their own responsibility, their own environment."
Trichet, who last month voiced concern about excess volatility in exchange rates, said Thursday that he trusts U.S. statements of support for a strong dollar - although the dollar fell two cents against the euro after Wednesday's Fed announcement.
Developing countries in Asia and Latin America have complained the United States appears to be trying to devalue its currency, which would give it a trade advantage.
"Trichet seems to be one of the few people - maybe the only one - in the world to still believe in the U.S. administration's strong dollar policy," said Carsten Brzeski, an economist at ING in Brussels.
The prospect of more dollars in the system has led many investors to believe that the U.S. is operating a policy of "benign neglect" toward the value of its currency as a lower dollar will boost exports and lift growth.
By late afternoon London time, the euro was trading 0.6 percent higher on the day at $1.4225, shy of its earlier high of $1.4281.
"The ECB has clearly no intention to follow the Fed or other central banks with further stimulus," Brzeski said.
He argued that the ECB's next move likely will be to end unlimited allotments of short-term credit to banks in three-month lending operations, though that may not happen until after next year's first quarter.
In the past, Brzeski noted, Trichet frequently remarked that central banks are a "very impressive brotherhood of mutual admiration" - but that appears to have changed.
"This brotherhood has not been broken up but its two most important members are now going their separate ways," said Brzeski.