WIESBADEN, Germany (Thomson Financial) - European Central Bank president Jean-Claude Trichet said the ECB's large injections of liquidity in December ensured a smooth year-end in euro zone money markets, but tensions in longer-term money market rates remain significant.
The ECB injected a massive 348.6 bln eur of two-week funds into the market on Dec 18, having said in advance that it would meet all bids for funds at 4.21 pct and above.
'This action, combined with our liquidity absorbing operations until Jan 4, contributed to a smooth end of the year in the euro area by keeping short-term interest rates close to the ECB's minimum bid rate,' Trichet said in a speech at a meeting of the CDU party's management board.
He said tensions in longer-term money market rates 'have receded whilst remaining significant'.
These tensions are due to the persistence of uncertainties surrounding the financial health and liquidity needs of financial institutions as well as the impact of the ongoing global financial market correction, he said.
The ECB's liquidity operations have contributed to a better resilience of the European financial system but cannot eliminate the causes of the tensions, he said.
Trichet reiterated that the ECB governing council stands ready to counter euro zone inflation risks which are 'clearly on the upside' but he said his remarks should not be interpreted as giving any indication on the council's rate decision on Thursday.
The council is currently in the 'purdah' period in which it avoids new comments on monetary policy in the week ahead of a rate decision, so he said his comments simply reflect the diagnosis that the council made at its last meeting on Dec 6.
He said rises in oil and food prices are having a strong upward impact on inflation which is expected to remain significantly above 2 pct in the near future and moderate only gradually in the course of 2008. Inflation was 3.1 pct in December.
GDP growth is likely to have moderated in the fourth quarter but the euro zone's economic fundamentals remain sound, he said.
And strong money and credit growth point to upside risks to price stability at medium to longer-term horizons, he said.
The ECB reported on Thursday that euro zone M3 grew 12.3 pct year-on-year in November, matching the record level already reached in October.
'On the basis of latest available data, covering the period to the end of Nov 2007, the underlying money and credit expansion remains vigorous, even taking temporary factors into account, such as the flattening of the yield curve, the financial market turmoil and specific transactions associated with the restructuring of certain banking groups,' he said.
He said there is still little evidence that the financial market turbulence of recent months has strongly influenced the dynamics of broad money and credit aggregates.
Trichet said the euro zone housing market appears set for a soft landing, but acknowledged that trends may differ significantly between countries.
'The outlook for the euro area as a whole - I insist, for the euro area as a whole - remains that of a relatively soft landing,' he said. steve.whitehouse@thomson.com sw COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.