ECB stumbles out the exit

December 3, 2009

The European Central Bank stumbled through the exit door on Thursday with a convoluted and complicated attempt to explain to markets exactly how it was going about it.

Granted it had a lot to explain – it was trying to cut back its banking sector support in a humane fashion, without giving a signal on future interest rate changes. Nevertheless, it baffled some observers and caused a kerfuffle in markets.

Goldman Sachs’ Erik Nielsen put it nicely.  ”What a mess they made out of the communication, leaving a great deal of (intentional?) ambiguity. This ambiguity was partly rooted in their highly unusual use of the word “fixed”.

In his trademark Franglais drawl, Trichet said the rate the ECB will charges banks for one-year loans at its final handout later this month – vital to the evolution of lending costs in the real economy — will be “fixed at the average minimum bid rate of the main refinancing operations over the life of operation.”

“I stupidly thought this meant a continuation of the present regime of fixed rate full allotments (so a dovish sign), only to learn shortly afterwards that “fixed” now means “fixed to something that may vary…  I no longer feel so sure that I know what “fixed” means.” admitted Nielsen 

 What Trichet could have said was that banks’ interest charges will go up if and when the ECB hikes rates, but central bankers rarely keep things simple.

There were other problems. Trichet didn’t say clearly that the the ECB was cutting back the number of three month loans on offer to banks and left another important bit of information for a press release that journalists got as they shuffled away from the news conference.

“Looking beyond the first quarter of 2010, the Governing Council will take into account the need to smooth out the liquidity effect of the 12-month longer-term refinancing operations maturing during the second half of 2010,” it said. As for what that means, well, Je ne sais pas might be an apt response.

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