ECB officials fret over money market tensions


Rising money market interest rates are neither normal nor appropriate, European Central Bank policymaker Christian Noyer said on Friday, in remarks partly echoed by his colleague Axel Weber.

The ECB could not tolerate continued tensions on interbank lending markets, the French central bank chief said, and Weber contrasted them with the gains in European share prices over the past month. Noyer and Executive Board member Lorenzo Bini Smaghi also highlighted a poor inflation outlook, though their colleague Miguel Angel Fernandez Ordonez was more relaxed and said the ECB’s current interest rate policy was still appropriate.

Euribor rates, which act as a benchmark for euro-zone interbank lending costs, have risen to their highest levels since last December as banks suck up extra ECB and US Federal Reserve funding but remain reluctant to lend. “The present situation is not something we can consider normal or appropriate,” Noyer said in an interview with the Wall Street Journal. “In a banking system very much made up of universal banks, funding costs are not at all reflected by this abnormal level of the Euribor.” “These developments are a concern and we have to continue to follow them very closely,” he added.

The ECB has repeatedly intervened in the interbank lending market since the US subprime problems spilled over to European markets last summer. But while the ECB has succeeded in keeping overnight bank lending rates close to its 4% policy rate, injections of three-month and even six-month funds have failed to tame longer term lending rates.

Speaking at a banking conference, Bundesbank President Axel Weber said that the ongoing paralysis in lending and credit markets had come despite rosier conditions in equity markets. “It appears that the turbulence on financial markets is not yet over... But in the last few weeks the character of the turbulence has changed slightly.” “While the tensions on interbank money markets remain, share markets, for example, are noticeably firmer today than they were in mid-March,” he added.

ECB money supply and bank lending data published on Friday offered little evidence of a full-blown credit crunch hitting the euro zone, in line with regular assertions from the ECB. Weber also repeated the G7 industrialized nations calls for banks to be more open about potential subprime losses. M3 money supply growth slowed at the sharpest pace since 1993 although economists said the data was unlikely to ease the ECB’s inflation fears. “It supports the ECB’s perception that upside risks to inflation still persist and that there’s no scope to cut interest rates,” said Commerzbank economist Michael Schubert. “I think the ECB will still feel uncomfortable. The decline in the year-on-year (M3) rate is primarily due to a base effect. If you look at the month-on-month rate it’s still rather high.” After steadily raising rates from 2% since December 2005, the ECB has kept interest rates at 4.0% since June, despite inflation hitting record highs of 3.6% in March.

Noyer said the inflation outlook had worsened since March 19 but he still expected inflation to come down from current highs. “We know now that the inflation hump will be longer and higher than what I expected then. But it should come down afterward, and that does not change the profile -- it’s just a bit later, and from a somewhat higher level,” he said in the newspaper interview. Bini Smaghi was even starker in his inflation warnings, when he castigated political criticism of the ECB’s anti-inflation stance in an Italian magazine. “Inflation has reached intolerable levels and to continue to ask the ECB to ignore it is not acceptable for European citizens,” he told Il Mondo weekly. But Spanish central bank chief Ordonez was more circumspect, when talking to reporters late on Friday saying he expected inflation to fall back in line with the ECB’s sub-2% target later in 2009. “We have to keep a close eye on data. If the data change, (monetary) policies could change but up to now I don’t see any radical changes,” he said at the Bank of Spain.

Despite rising food and commodity prices boosting inflation and the credit crisis shocking the world’s financial system, Germany’s robustness has been a key factor in holding up the euro zone growth average. Analysts say the world’s biggest exporter is helping mask problems elsewhere in the region. Spain cut its 2008 and 2009 growth forecasts by more than three quarters of a percentage point on Friday when unemployment jumped to a three-year high. (Reuters)

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