AP News, August 22nd, 2007
The European Central Bank, which has repeatedly pumped extra funds into European money markets for two weeks, said Wednesday it plans to auction supplementary three-month funds valued at $53.97 billion to provide more liquidity to cash-hungry markets.
The move prompted a new debate whether the bank would move forward in raising its benchmark interest rate, a decision that will be announced Sept. 6.
The 40 billion-euro tender is scheduled for Thursday and will not hamper the 13-nation bank's regular call for bids of three-month funds on Tuesday.
The supplementary tender bid is lower than the 50 billion euros ($67.46 billion) set for its regular three-month move.
The bank offered no real clues as to whether an increase in its benchmark rate from 4 percent to 4.25 percent was likely at its meeting in September, but in a statement referred to comments made by the bank president earlier this month.
ECB President Jean-Claude Trichet said three weeks ago that the bank was maintaining "strong vigilance" toward inflation, possibly signaling a rate increase.
Given the market turbulence since then, however, analysts have said that any rate increase may churn up more unease.
HVB economist Marco Kramer said the bank's message on Wednesday meant it was still mulling a rate increase.
"This means the ECB is still thinking about hiking rates on Sept. 6, because that was what Trichet intended to signal to the market when talking about 'strong vigilance' at that time," Kramer wrote in an e-mail shortly after the new tender was announced.
He also said the ECB is leaving all options on the table for the meeting.
"Today's statement had the intention to give a strong signal to the market, which was facing increasing uncertainty how binding the 'strong vigilance' wording was in the context of the financial market disruptions," Kramer said. "This is a very pragmatic monetary policy approach, the ECB is doing well these days in handling the crises, both, in terms of measures and statements. All this will help to calm down markets."
But Michael Schubert of Commerzbank AG said that given the market turmoil, any forecast of the ECB's move is uncertain at best.
"Comments by central bankers like the one from (Bundesbank President Axel) Weber made last Friday suggest that the bank is willing to delay any rate hike as long as the market uncertainties continue," he said. "Therefore, any forecast about possible rate changes has to make an assumption about the further development of the market crisis."
On Tuesday, the ECB provided more cash for banks that have been clamoring for money, injecting 275 billion euros ($371.06 billion) in its normal weekly refinancing.
Central banks worldwide have injected billions of dollars into money markets this month in efforts to calm nervous investors.
The credit crunch started with rising defaults in U.S. subprime mortgages, or home loans made to people with weak credit histories. It spread after banks that held those loans repackaged them with other loans and sold them to investors.
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