The European Central Bank is not set on raising rates in September, and its recent reference to its Aug. 2 policy statement was intended to keep options open, national central bank officials have told Reuters.
Instead, the ECB is focusing on current financial market turbulence, which will be the decisive factor in determining whether it raises rates by a quarter percentage point to a six-year high of 4.25%.
"If there is a normalisation in the markets a rate hike is still possible. If not the ECB will wait with the next step," said a senior official at a euro zone national central bank.
The credit squeeze on financial markets has worsened since Aug. 2, when ECB President Jean-Claude Trichet said that "strong vigilance" was needed on inflation, language the ECB has used the month before all rate increases in its current cycle.
But since then the ECB has intervened repeatedly in euro interbank lending markets to lower soaring commercial interest rates -- a consequence of a global surge in risk aversion due to the U.S. subprime mortgage crisis.
This prompted markets to lower the odds of an ECB rate rise in September to about 20%, only for the probability to leap back above 50 % when the ECB referred back to its Aug. 2 statement on Wednesday.
As part of an announcement that it would hold its first-ever emergency injection of three-month funds, the ECB said: "The position of the Governing Council of the ECB on its monetary policy stance was expressed by its President on 2 August 2007."
Many economists interpreted this as a signal that the ECB still intended to raise interest rates next month. That interpretation is wrong, the national central bank official said.
"The ECB wanted to signal a clear distinction between money market operations and its monetary policy outlook. They wanted to signal that the tender operation should give no hint on the interest rate decision," the official said.
"You can't exclude that the Council will really increase rates, but they will wait with their decision as long as possible. There are other important data like (Germany's) Ifo index. Why shouldn't they wait in this volatile situation?"
"With this sentence the ECB reserved the right to hike rates, but it wasn't meant to state: 'We're going to do it."'
Market Developments Crucial
This view was backed up by a second euro zone central bank official. "(The ECB's statement on Wednesday) was a way of keeping options open for September, and saying clearly that day-to-day market operations should not be confused with rate decisions, that they are two different things."
"It would be wrong to see it as signalling a rate hike. But after the Fed had cut it was also a way of telling markets and commentators the ECB is not going to be pressured into anything."
The U.S. Federal Reserve cut its discount rate for emergency bank lending by 50 basis points to 5.75% on Aug. 17.
The official said it would be wrong to assume that nothing had changed in the ECB's policy assessment since Aug. 2, and added that market developments were critical.
"There could still be a hike in September if the markets have settled -- the ECB wanted to keep intact its room for manoeuvre," the official said. "What happens in September will also depend on data from the real economy."
Another top-ranking official at a national central bank also sought to play down the idea that Wednesday's statement was meant to presage an interest rate increase.
The policymaker told Reuters the ECB was very much focused on volatility created by U.S. subprime mortgage problems and the impact a September rate hike could have on markets. "I think the ECB is focused on the current situation," the official said.
Trichet's Aug. 2 statement was not in any event meant as a clear-cut endorsement of a September rate hike. Trichet stressed that the bank was not pre-committing itself to a rate move and declined to comment directly on the chances of a September rate hike.
He added: "Shifts in market sentiment need careful monitoring. We will continue to pay great attention to the developments in the market over the period to come."
Equally, officials did not indicate that a pause in ECB rates in September would mark the end of the tightening cycle.
The ECB has pointed in the past to rapid money and credit growth as an inflation risk, and as a contributory factor to investors' previously strong appetite for risk.
The euro zone banking system as a whole is not short of liquidity. The problem has been that banks which have more funds than they need will not lend it to others, in case they get caught by hidden exposure to U.S. subprime mortgages.
Once interbank lending markets are functioning more normally, the issue of how to tackle accommodative financing conditions will be back on the table.