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ECB injects €42.2bn into money markets

Financial Times | September 6, 2007
Ralph Atkins

The European Central Bank has injected €42.2bn into euro money markets in its latest emergency liquidity-boosting operation that came as the bank's governing council met for its monthly interest rate setting meeting.

The operation, making extra cash available for one day, followed a surge in overnight interest rates this week that has set back the ECB's hopes that conditions in money markets were normalising.

The timing appeared to make it almost impossible for the central bank to announce on Thursday that it is lifting its main interest rate. “There is little for the ECB to gain by raising rates at this point but plenty to lose,” said Ken Wattret, economist at BNP Paribas.

The ECB launched emergency liquidity boosting operations on August 9, when it injected an unprecedented €94.8bn. Until this week it had succeeded in bringing down overnight interest, and Jean-Claude Trichet, ECB president, sought to signal a return to business as normal. But a later injection into the market for three-month money failed to have the same effect and on Wednesday overnight interest rates approached the 4.7 per cent peak seen on August 9.

So far, the ECB has seen a clear distinction between its main monetary policy decisions - aimed at combating long term inflation dangers - and operations aimed at ensuring the proper functioning of markets. But an increase in interest rates this afternoon would be hard to explain so soon after another emergency liquidity boosting operation and with financial market turmoil continuing,analysts said.

Although the central bank signalled at the start of August that a quarter-point rise in its main rate to 4.25 per cent was likely in September, Mr Trichet last week indicated that it had reconsidered its options. A rise today would shock markets.

On Thursday afternoon Mr Trichet is to express confidence in the underlying strength of the eurozone economy and signal that the ECB's bias remains towards increasing interest rates at some point. But it is likely to wait for calm to return to financial markets before acting.

Since the end of 2005, the ECB has raised its main interest rate eight times by a quarter percentage point, most recently to 4 per cent in June.


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