European Central Bank again offering U.S. dollar liquidity

ECB, BoE hold interest rates steady

The European Central Bank today announced that it will be offering more U.S. dollar liquidity in an effort to help keep money markets working.

The ECB Governing Council of the ECB has decided, in conjunction with the U.S. Federal Reserve Board, to offer further U.S. dollar liquidity in January. The bank said that the purpose of the move is, “to contribute again to satisfying the exceptional needs for dollar funding and to facilitate the further normalization of conditions in the money market.”

The operations will have the same size and will be conducted according to the same procedures as those carried out in December 2007. They will be settled on January 17 and 31, with a maturity of 28 days each and for an amount of US$10 billion each.

Also today, the ECB left its key interest rate unchanged at 4% amid signs inflation in the euro zone is on the rise.

The Bank of England also held rates steady at 5.5%.

CIBC World Markets says that both non-moves were expected, but the two central banks seem to be leaning in opposite directions.

This was the seventh consecutive month that the ECB opted for a wait and see policy decision, CIBC World Markets notes. However, unlike the U.S. Federal Reserve Board or the Bank of England, the bias is towards higher rates, CIBC suggests.

“An analysis of the European Central Bank President Jean-Claude Trichet’s press conference is totally consistent with our assessment for Eurozone rates this year: it will either be unchanged or rate hikes on the monetary policy front, rate cuts are clearly off the agenda for now.”

However in England, CIBC says, “a rate cut cannot be too far away and in fact, we believe that some members may have voted for a rate cut today.”

“It would appear that a majority on the MPC have preferred to wait and see this month, with next month’s updated BoE inflation and growth forecasts providing a good opportunity to justify further monetary easing,” CIBC suggests.

“Looking further ahead, we also believe that the MPC will have to ease policy more than once this year, with a sharp softening in the economy and a below trend growth outlook warranting a looser monetary stance.”