ECB gears up to give banks one-year liquidity

WASHINGTON (Reuters) - The European Central Bank will reintroduce its 12-month liquidity operations to help banks with longer-term fund-raising and to reduce jitters in the markets, policymakers indicated on Friday.

Dovish central banker comments also increased analyst and market expectations of an impending interest rate cut, with some seeing a 50 basis point reduction as soon as next month, although such a move remains far from certain.

ECB Governing Council member Jens Weidmann said on Friday the ECB had shown in the past that it can provide banks with long-term one-year liquidity when needed, with his colleagues from Austria and Belgium also talking up such a measure.

Austria's Ewald Nowotny said: "One of the instruments we had was, in the context of full allotment of policy, to have one-year tenders. I think it might be advisable to think about reintroducing this approach. We could discuss a reintroduction."

Asked whether the ECB could inject another round of one-year liquidity into markets following the recent spike in interbank tensions, the Bundesbank's Weidmann said the ECB had done so in the past and could do so again if needed.

"In the past we have said that we are prepared to provide the market with longer-term liquidity when it is necessary," he told reporters at the IMF's annual meeting.

"We still have full allotment (unlimited liquidity) and with the non-standard measures the central bank and the euro system has shown that it has the ability to act."

Belgium's Luc Coene took a similar line saying the ECB "could perfectly do" longer-term refinancing operations if there were an urgent need.

ECB policy-makers rarely talk up measures before there is a general consensus about their implementation. With three governing council members speaking of one-year liquidity within hours of each other, analysts said it was close to a done deal and could come as early as this month.

"This is an environment that is screaming for an intervention by the ECB," Lena Komileva of Brown Brothers Harriman said.

"I wouldn't be surprised if it were before the next meeting," she said, referring to reintroducing 12-month liquidity operations. The next ECB rate decision meeting is scheduled for October 6.

The first time the ECB ran a 12-month operation was in June 2009, when it saw blockbuster demand from more than 1,000 banks taking a combined 442 billion euros.

However, as money market strains eased, the central bank discontinued the tenders, with the third and so far last one taking place in December 2009.

With long-term ECB-provided funds, banks are less dependent on each other for funding and can plan their lending with less of an eye on market tensions.

Financial markets have reacted sharply to the recent intensification of the euro zone debt crisis and brisk downturn in the bloc's economy.

The ECB recently reintroduced six-month euro liquidity, as well as three-month dollar liquidity in a bid to head off wider money market tensions.

German finance minister Wolfgang Schaeuble, speaking alongside Bundesbank chief Weidmann, highlighted that the line in the G20 statement issued late on Thursday that central banks would continue to provide liquidity was deliberately positioned after the one saying authorities would ensure banks were capitalised.

RATE EXPECTATIONS

With the euro zone being heavily buffeted by the bloc's debt crisis, expectations have risen that the ECB could reverse this year's two 25 basis point rate increases at its October meeting and take rates back to a record low of 1 percent.

Weak data and increasing prospects of a Greek debt default have given rise to fears of an impending recession in the euro zone, which would give the ECB impetus to cut rates.

"We now expect the Euro area to slide back into recession, with GDP declining at a 1 percent annualized pace from Q4 2011 to Q2 2012," JP Morgan analyst Greg Fuzesi wrote in a note to investors.

"As a result, we now expect the ECB to cut its main policy interest rate by 50 basis points to 1.0 percent at its next meeting in two weeks' time," he said.

Weidmann brushed off suggestions the economy was falling off a cliff, saying the economic situation in Germany was clearly better than the current mood suggested.

"A new recession (in Germany) is not my expectation," he said. He also warned a new round of government stimulus measures would not help the overall euro zone situation and could damage Germany's image as an anchor of stability.

Christine Lagarde, the head of the IMF, singled out another of the key issues facing the ECB, the future of it's controversial bond purchase program.

Weidmann and Austria's Nowotny both separately repeated their discomfort with the purchases, but Lagarde said the ECB should consider continuing to buy bonds even once the euro zone bailout fund is given the power to do so.

"The ECB is doing it (buying bonds) reluctantly and not with great certainty and predictability, which in the long run is certainly a bit of an issue," she said in response to questions after a speech to the Bretton Woods Committee.

"I personally wonder whether it would not be necessary to have a combination of both (ECB and EFSF bond buying)," she said.

(Reporting by Marc Jones, additional reporting by Eva Kuehnen, and Mark Felsenthal, writing by Sakari Suoninen, editing by Catherine Evans and Chizu Nomiyama)