Awaiting the ECB

European Central Bank policymakers are gathering in Frankfurt ahead of their meeting tomorrow. They have quite a few decisions to make, which together will set the course of ECB liquidity provision for at least the next few months. Likely to set the general tone will be what Jean-Claude Trichet, ECB president, has to say about future provision of unlimited 12 month liquidity. As I have already written, it seems almost certain he will announce that the December offer will be the last. Less clear is whether the terms will be tightened.

After November’s governing council meeting, I blogged about the possible attractiveness of indexing the interest rate, so that it varies according to the main ECB policy rate. I don’t think my mind has changed much since. The argument against indexation is that it might seem too complex. It is also true that when the 12 month offers were announced in May, the ECB said they would be conducted at a “fixed rate” – which would appear to rule out indexation. But the ECB announcement then also said “the fixed rate may include a spread,” and I don’t see why a “spread” can’t vary.

The risk is that indexation is seen by markets as some kind of monetary policy tightening. Not unrelated will be the governing council’s discussion on eurozone growth and inflation prospects, based on revised economic forecasts.

With the euro ticking upwards again this week, Mr Trichet will calibrate his comments especially carefully as Ben Bernanke will speak a few hours later in Washington at hearings on his re-appointment as US Federal Reserve chairman. But it is a fair bet that Mr Trichet’s view of the world will be cautious.

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