Masterly reticent

After months and months of exciting and surprising ECB press conferences, today’s meeting brought some welcome boredom. As expected, the ECB kept interest rates unchanged at today’s meeting. The most important announcement came on the ECB’s liquidity provision: the ECB decided to return its 3-months LTROs to crisis mode of full allotment and fixed rates until the end of September.

The ECB’s assessment of the economy and the inflation outlook were almost a verbatim copy of the May assessment. The recovery remains on track and the ECB has become more positive on the first half of the year. However, president Trichet continued to stress unusually high uncertainty. Turning to inflation, President Trichet reiterated last month’s distinction between headline inflation and domestic price pressures. While strong global growth and energy prices could still lead to higher headline inflation, the ECB expects domestic price pressure to remain low.

This cautiously positive outlook was confirmed by the latest ECB staff projections. For 2010, both the growth and inflation outlook were slightly revised upwards from the March forecasts. For 2011, growth expectations have been lowered. In detail, ECB staff expects GDP growth to come in at 1.0% in 2010 and 1.2% in 2011 (from 0.8% and 1.5%). As regards inflation, ECB staff now expects headline inflation at 1.5% in 2010 (from 1.2%) and 1.6% (from 1.5%) in 2011. Inflationary pressure looks different. It did not come as a surprise that the current level of interest rates remains “appropriate” – a clear hint of the ECB’s intent to keep rates on hold in the near term.

As expected, most questions at today’s press conference were on the ECB’s de facto quantitative easing and the clumsy communication around it. Trichet repeated earlier comments and speeches, stressing that the bond purchase programme was necessary to ensure an effective functioning of monetary transmission in all market segments. He did not give any additional details on the planned total amount of the programme or the regional focus. To ensure that certain Bundesbankers do not get overcome with fear of hyperinflation, Trichet emphasised the ECB’s determination to maintain price stability. The ECB remains “inflexibly attached to price stability”.

Trichet also stressed the sterilisation of the bond purchases. However, it is rather a pseudo sterilisation if banks can still get abundant liquidity at the ECB. And this will not change soon. Today, the ECB announced it would extend the 3-month LTROs with full allotment and fixed rates until the end of September. Possible liquidity needs stemming from the maturing one-year LTRO at the end of June will be smoothed. Moreover, the high level of deposits at the ECB does not only reflect increased money market tensions but should also work as a buffer. In fact, this implies that ample liquidity will remain in the interbank market until the end of the year.

To sum up, the ECB has again moved into a wait-and-see position. The ECB confirmed its inflation-fighting spirit, while at the same time providing ample liquidity at least until the end of the year. After several u-turns, clumsy communication and sharp criticism, the ECB today tried to recover its old poise. President Trichet was back in shape, being masterly reticent.