By Johanna Treeck

FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet Thursday presented significant upward revisions to Eurozone
growth forecasts and noted further improvement in money markets, but he
nevertheless pledged to maintain the current level of support at least
until mid-January 2011.

Although Trichet sounded surprisingly optimistic and emphasized
that “we are in a process” of exiting from non-standard operations, the
ECB may still postpone for quite some time a second attempt to withdraw
the emergency liquidity measures.

Current interest rates remain “appropriate,” Trichet said. He not
only added that the interest rate decision was “unanimous,” but also
stressed that “the Governing Council has no intention to signal any
change in the present interest rates.”

Even upwardly revised HICP forecasts from the ECB’s staff remain
well within the central bank’s price stability target of close to but
below 2.%. Stagnating bank lending will keep the central bank on an
extra careful footing when considering rate moves. The ECB staff hiked
the inflation forecast midpoint for 2010 to 1.6%, from a previous
projection of 1.5% in June. For 2011 the upward revision was more
pronounced, to 1.7% from the previous figure of 1.1%.

The ECB’s decision to extend fixed-rate, full-allotment procedures
for all major liquidity operations into next year had been widely
expected. In contrast to the interest rate decision, however, there was
some disagreement over how to proceed with non-standard measures in the
months ahead, Trichet revealed, noting that the decision was reached by
“consensus.” He did not disclose whether the dissidents had called for
more or less liquidity support.

The ECB president indicated that the decision was not merely
motivated by the need to smooth end-of-year liquidity tensions, as had
been suggested by Council member Axel Weber last month. Trichet pointed
out that not all operations are “at the end of the year” and that the
situation remained “very complex.”

The ECB clearly remains concerned about the high and in some cases
still-rising rising dependence on ECB funding by banks in weaker
Eurozone countries, including Greece, Spain and Ireland. The central
bank’s reluctance to scale down liquidity supply despite notable
improvements in the aggregate, suggests that its policies are
increasingly directed at the weakest links in the system.

Trichet said that “we are in a process” of exiting from
non-standard operations, pointing to the expiry of the last 6-month and
12-month tenders. But a focus on the vulnerable periphery would suggest
that the fixed-rate, full-allotment terms may remain in place for quite
some time, at least in the weekly and monthly operations, even as
overall conditions improve.

And improved they have: the ECB’s staff raised the growth forecast
for 2010 to a mid-point of 1.6% from 1.0% in June. One year ago, the ECB
staff had expected 2010 growth to be almost stagnant at 0.2%. Forecasts
for 2011 were also lifted, although mainly as a result of the carryover
effect from 2010. For 2011, ECB staff now see growth at around 1.4%
after 1.2% in June.

Although Trichet said that in the Governing Council’s view there
were some downside risks to this forecast, he sounded surprisingly
positive overall.

A downgraded U.S. outlook and more generally slowing global growth
had sparked fears that the region could take an unexpectedly strong hit
in the second half of 2010.

Trichet, however, insisted that developments in the U.S. had not
caught the ECB off guard. “What we see is more or less what we had in
mind and we are not disappointed or not too much disappointed because we
were not considering that it was very likely that there would be
extraordinarily dynamic growth,” he said.

Although recent data for the Eurozone “confirm the expectations of
a moderation in the second half of the year,” they also indicate “a
positive underlying momentum of the recovery,” Trichet insisted. A
double-dip recession is not in the cards, he said.

Nevertheless, emphasizing ongoing uncertainty as regards the
outlook, Trichet reiterated that the ECB is not declaring victory.

Having been forced more than once already to abandon planned moves
towards the exit from non-standard measures, the Council may want to see
some of that uncertainty dissipate before making another attempt.
Consideration for weaker member-states could push such an attempt even
further out than currently expected.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]