A Forex View From Afar

The ECB Press Conference: Bank Decides To Initiate Open Market Bond Operations

• The Governing Council decided to reduce the interest rate on the main refinancing operations of the Euro-system by a further 25 basis points and the rate on the marginal lending facility by 50 basis points, to 1.00% and 1.75% respectively.
• Current key ECB interest rates are appropriate taking into account all available information and analysis
• The ECB will conduct liquidity-providing longer-term refinancing operations with a maturity of 12 months
• The operations will be conducted as fixed rate tender procedures with full allotment […] the fixed rate may include a premium to the rate on the main refinancing operations, depending on the circumstances at the time.
• The Governing Council has decided in principle that the Euro-system will purchase euro-denominated covered bonds issued in the euro area
• Furthermore, the Governing Council has decided that the European Investment Bank will become an eligible counterparty in the Euro-system’s monetary policy operations
• These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help to improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises.
• Today’s decisions take into account the expectation that price developments will continue to be dampened by the substantial past fall in commodity prices
• The latest economic data and survey information suggest tentative signs of a stabilization at very low levels, after a first quarter which was significantly weaker than expected
• The world economy, including the euro area, is still undergoing a severe downturn, with the prospect of both external and domestic demand remaining very weak over 2009 before gradually recovering in the course of 2010
• This weakening in the first quarter appears to have been significantly more pronounced than projected in March
• On the downside, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy, as well as that protectionist pressures could intensify
• At the same time, there may be stronger than anticipated positive effects due to the decrease in commodity prices and to the policy measures taken.
• The decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period.
• Signs of a more broad-based reduction in inflationary pressure are increasingly emerging.
• We expect to see headline annual inflation rates declining further and temporarily remaining at negative levels for some months around mid-year.[…] short-term dynamics are, however, not relevant from a monetary policy perspective
• The latest data confirm the continued deceleration in the pace of underlying monetary expansion
• Month-on-month developments in M3 and its components have remained volatile, with data for March showing a contraction in most of the respective outstanding amounts
• The outstanding amount of MFI loans to the private sector contracted further in March, reflecting mainly a negative flow of lending to non-financial corporations
• All in all, since the intensification of the financial crisis in September 2008, the Euro-system has taken a series of measures that are unprecedented in nature, scope and timing.
• We have observed a clear decline in key money market interest rates that euro area banks typically use as benchmarks to reset floating rate loans and price new short-term loans
• Monetary policy has provided ongoing support for households and corporations.
The Governing Council decided to intervene in the Euro-area’s bond market. The European Central Bank will buy up to 60 billion of covered bonds, which are financial securities backed by the cash flows from mortgages. To some extend, covered versions are the European version of the ABS instruments, only much safer. Mr. Trichet also mentioned that the intervention in the covered bond is not a quantitative easing program, but an “enhance credit support program”.

Additionally, the Council members decided that the European Investment Bank will be able to bid in the bank’s open market operations. This means that the ECB will open its doors to government debt instruments, something that was out the bank’s reach until now. The bank also decided to increase the open market operations’ maturity up to 12 months, which can be use by banks to strengthen their balance sheets and unload most of their toxic assets.

TheLFB-Forex.com notes that the euro traded very volatile during the press conference. In the first 15 minutes, the euro plunged 90 pips and recovered everything back. The single-currency gained 150 pips and almost touched the 200-day moving average during the press conference as Mr. Trichet said that he cannot exclude lower rates, but the current one are appropriate.

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