Europe

Trichet Says ECB to Scale Back Emergency Loans


By Christian Vits and Simone Meier

(Bloomberg) — European Central Bank President Jean- Claude Trichet said the bank will scale back its flagship emergency financing operations next year as the euro region starts an "uneven" recovery.

"The improved conditions in financial markets have indicated that not all our liquidity measures are needed to the same extent as in the past," Trichet said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1 percent, a record low. "Liquidity will remain extremely abundant for a large number of months to come."

The ECB will link the rate on the Dec. 15 tender of 12- month funds to the average of the bank's benchmark over the year, a departure from its current policy of offering the money at a fixed 1 percent. Trichet stressed the move isn't a signal the ECB has decided to raise its main rate, which he described as "appropriate."

The ECB has been flooding banks with cheap cash to fight Europe's worst recession since World War II and revive lending among banks. As the economy recovers, policy makers are pulling back liquidity to prevent inflation and asset bubbles.

"The gentle exit has begun," said Carsten Brzeski, senior economist at ING Group (ING) in Brussels. "It will be very gentle in the beginning but eventually it will end in rate hikes."

The euro slipped 0.3 percent to $1.5080 after Trichet's comments. The yield on the benchmark two-year German government bond was little changed at 1.332 percent.

Loan SupplyTrichet also said the supply of six-month loans will expire at the end of the first quarter. The ECB will continue to provide banks unlimited funds in its main refinancing operations at a fixed rate at least until April 13.

The ECB raised its economic outlook. It forecasts growth of 0.8 percent next year, up from the 0.2 percent projected in September. Growth will accelerate to 1.2 percent in 2011, the new forecasts showed.

The ECB sees inflation averaging 1.3 percent next year and 1.4 percent in 2011. It aims to keep the rate just below 2 percent.

Referring to the euro's exchange rate, Trichet said it's "very important" that the U.S. has a "strong" currency.

The euro has gained 18 percent against the dollar since the middle of February, threatening to slow the region's recovery by hurting exporters. Daimler AG (DAI), the world's second-largest maker of luxury cars, said yesterday it will shift some production to Alabama from Germany as it seeks to benefit from the cheaper dollar.

To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Simone Meier in Frankfurt at smeier@bloomberg.net

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