By Steven K. Beckner

JACKSON HOLE, Wyo. (MNI) – European Central Bank President Jean
Claude Trichet insisted Saturday that the euro-area does not face a
liquidity problem.

Trichet, answering questions at the Kansas City Federal Reserve
Bank’s annual Jackson Hole symposium, also reemphasized the ECB’s
commitment to price stability and said that its anchoring of inflation
expectations have kept European interest rate levels low, irrespective
of yield spreads among European nations.

Some participants thought Trichet might have been rejecting a
statement by fellow Frenchman Christine Lagarde, head of the
International Monetary Fund, who urged that monetary policy stay “highly
accommodative.” But arguably, if anything, Trichet, in earlier prepared
remarks, seemed to provide a potential justification for renewed ECB
easing at some point.

Referring to the ECB’s extended long-term financing operations,
Trichet said banks have more than enough collateral and said “the idea
that we have a liquidity problem in Europe is plain wrong … because
of this non-standard measure we have taken.”

Trichet said that, in pursuing both “standard” and “nonstandard”
monetary policy steps, the ECB remains committed “to the delivery of
price stability.”

“A very solid anchoring of inflation expectations is one of our
major assets,” he said, adding that it is “absolutely essential for
confidence in Europe, for the confidence of people in the central bank.

Having that confidence in price stability “helps considerably in
difficult circumstances,” he said, aiding the ECB in promoting economic
growth.

If inflation expectations were not anchored, he said longer term
interest rates “would incorporate destabilization of inflation
expectations,” said Trichet.

Referring to wide spreads between yields on German and other bonds
and those of countries such as Greece, Trichet said he “deplores”
them and called them “unjustified.”

Trichet was responding to a question about former French finance
minister Lagarde’s comment that “monetary policy also should remain
highly accommodative, as the risk of recession outweighs the risk of
inflation.”

But Trichet has often asserted the ECB’s price stability goal, and
in prepared remarks he said that objective is not inconsistent with
using “nonstandard” monetary policy measures. He also seemed to
highlight downside economic risks while downplaying the threat of
inflation when he said, “the recent financial crisis has produced a
large and persistent downturn in our economies; a downturn, moreover,
that threatens our long-run growth potential.”

Meanwhile, former Bank of Japan deputy governor Yutaka Yamaguchi
rose to issue a strong warning against holding interest rates too low
indefinitely.

Drawing on his experience with the BOJ’s extended zero rate policy
and how it affected Japanese fiscal policy, Yamaguchi said, “monetary
policy is providing a huge disincentive for politicians to move to fiscal
consolidation anytime soon.”

“Based on my experience in my country, it is rather natural for
polticians to (indulge in) fiscal forbearance when they find financial
market conditions extremely accommodative, when they find yields on
government bonds at current extraordinarily low levels,” Yamaguchi
continued.

“When easy monetary policy if pursued for many years as it has been
for many years in my home country of Japan the adverse side effects tend
to grow,” he went on. “What I’m now concerned about as the central banks
in advanced countries continue to go though present easy monetary policy
… the political pressure on central bankers to do more to finance the
budget deficit may grow as well.”

“At the very minimum I would hope that central bankers remain very
cautious when they talk about future monetary policy so as not to raise
excessive expectations for politicians that they may get something
more.”

** Market News International **

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