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ECB pledges more liquidity boosting if needed

Section: Daily Dispatches

By Ralph Atkins
Financial Times, London
Wednesday, September 5, 2007

FRANKFURT, Germany -- The European Central Bank announced on Wednesday that it is ready to intervene again to relieve tension in financial markets, the day before its governing council meets to discuss interest rate policy.

The ECB's pledge to launch a fresh liquidity-boosting operation on Thursday if necessary followed sharp rises in overnight interest rates and an earlier attempt by the Bank of England to calm financial market pressures. Euro overnight interest rates had earlier hit 4.685 per cent, almost as high as on August 9 when the ECB injected an unprecended E94.8 billion into money markets.

In a statement, the ECB said that volatility in the euro money market had increased that it was "closely monitoring" the situation. It went on: "Should this persist tomorrow, the ECB stands ready to contribute to orderly conditions in the euro money market."

Its action undermined the ECB's recent claims that conditions in money markets were normalising.

Meanwhile, the ECB governing council will meet on Thursday for its regular monthly discussion of monetary policy. Although the central bank signalled at the start of August that a quarter point rise in its main interest rate to 4.25 percent was likely in September, Jean-Claude Trichet, ECB president, has signalled subsequently that the bank had reconsidered its options. A rise on Thursday would now shock financial markets -- something the ECB would want to avoid.

So far the ECB has seen a clear distinction between its main monetary policy decisions -- aimed at combating long-term inflation dangers -- and measures to aimed at ensuring properly functioning markets.

The special liquidity-boosting operations, launched by the ECB on August 9 and continued over successive days, was followed by similiar action to restore order into the markets for three month money.

Details of the type of operation that may be launched on Thursday have not been decided. The ECB may decide to hold a one-day operation or a tender that lasts until the beginning of next week. But the ECB seems unlikely to let the market decide the volume of extra liquidity it requires -- as it did on August 9. Instead, it is more likely to launch a "variable rate" tender in which it decides how much extra liquidity to inject.

Julian Callow, economist at Barclays Capital, said that at this stage of the monthly interest rate-setting cycle the ECB was having to judge carefully how to keep overnight rates in line with its main policy rate. "So we don't think this could presage some more radical solution to easing the liquidity issues such as cutting reserve requirements to liberalise more collateral, or to revive the dollar-euro swap facility it announced soon after the September 11, 2001, terrorism with the US Federal Reserve."

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