European Central Bank plans indefinite liquidity boosts

Section:

By Ralph Atkins and David Oakley
Financial Times, London
Monday, October 8, 2007

http://www.ft.com/cms/s/0/bc7098ee-75d9-11dc-b7cb-0000779fd2ac.html

The European Central Bank pledged on Monday that it would inject extra liquidity into money markets for as long as is necessary in order to stabilise short-term interest rates.

The move suggested that the ECB had accepted that its work in attempting to ease financial market tensions was far from completed.

"The ECB continues to closely monitor liquidity conditions," it said in a statement ahead of its latest weekly refinancing operation, and would aim to reduce "volatility" in short-term rates around its 4 percent main policy interest rate.

With three-month euro Libor -- the average interbank rate offered in London for the single currency for the next three months -- trading at 4.767 percent, close to the six-year high of 4.795 percent recorded last week, market participants backed the ECB stance.

Amanda Sudworth, director of interest rate derivatives at Liffe, the international derivatives exchange based in London, said: "The market has normalised a bit since the summer, but interbank rates are still high because of the continuing uncertainty in the market."

She said short-term money market rates suggested there was still tension in the system.

With many in the market expecting the ECB to raise base rates from 4 percent, three-month euro Libor would in normal times trade at about 25 basis points higher, rather than nearly 80 bp higher.

The ECB announcement followed a promise by Jean-Claude Trichet, ECB president, last week after the central bank's governing council meeting in Vienna, to "continue to do what is appropriate in our view to help markets. ... We consider it our duty to act in such a way that the very short-term money market rates are close to the level of the interest rate that we have set for our main refinancing operations."

The ECB has not launched any emergency one-day liquidity boosting operations since September 6. Instead, it has focused on injecting extra funds during its regular operations.

As part of that strategy, the ECB said it would continue its policy of allocating more liquidity in its main refinancing operations than strictly necessary.

But it said that the difference between the allotted and benchmark amount would "decline gradually" over the course of the maintenance period of roughly a month, the latest of which starts on Tuesday. "The ECB still aims at balanced liquidity conditions at the end of the maintenance period," it said in its statement.

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