The ECB just can't make up its mind these days. First it launches a preemptive form of QE, then its directors write lengthy essays against those (cough, Germany, cough) who say its policies are flawed and inflationary, and now after flooding the market with cash, it continues to rush to take the extra liquidity out of the market. As announced earlier on its website, the ECB will withdraw another €35 billion in liquidity in the form of a one-week variable-rate tender capped at 1%, to be conducted on June 1 at 11:30 am. This is the same as the amount of government bonds purchased by the bank in the prior week, thus undoing all temporary QE benefits in the span of 7 days. This is the third and so far largest "sterilization" tender conducted in the past three weeks: the first and second were for €16.5 and €26.5, respectively.
From the ECB:
As announced by the Governing Council on 10 May 2010, the ECB will conduct specific operations in order to re-absorb the liquidity injected through the Securities Markets Programme. In this regard, the ECB will carry out a quick tender on 01 June at 11.30 in order to collect one-week fixed-term deposits with settlement day on 02 June. A variable rate tender with a maximum bid rate of 1.00% will be applied and the ECB intends to absorb an amount of EUR 35 billion. The latter corresponds to the size of the Securities Markets Programme, taking into account transactions with settlement at or before Friday 28 May. The benchmark allotment amount in MROs takes into account the liquidity effect of non standard measures, assuming an unchanged size of the Securities Markets Programme and full sterilisation of this amount via the above mentioned liquidity-absorbing operation. Fixed term deposits held with the Eurosystem are eligible as collateral for the Eurosystem's credit operations. The ECB intends to carry out another liquidity-absorbing operation next week.
The problem is the ECB has no clue what is being percevied as more favorable by the market - the injection of liquidity or the withdrawal. With a 168 hour full cycle from QE to fixed-term tenders, the market basically knows the fully discount any short-term liquidity activity by the schizophrenic bank, which is demonstrating the kind of indecisivness that our own Fed hates, and an on-again/off-again accomodative relationship with Germany, which however may be too little too late.