New Monetary Policy Technique employed by the European Central Bank

In this weekend's FT Ralph Atkins discusses a new measure being employed by the ECB to deal with the ongoing liquidity crisis. This is somewhat unusual because it is a relatively long-term instrument in the context of the money markets. The ECB will be offering a six-month lending facility available from next week. They will in addition continue to offer regular three-month facilities as well the normal repo operations. These measures are all designed to bring some kind of normality back to the Eurozone money markets where there has recently been a sharp spike in interest rates. However, unlike other central banks the ECB looks to be stuck with 4% official interest rates for some time to come. This is because inflation remains stubbornly high with the latest figures for Germany showing an unexpected rise. Indeed if anything, there seems to be a risk that the next move in Eurozone interest rates might actually be in an upward direction. Against this background you can expect the euro to remain strong particularly against the dollar and the pound.