ECB officials play down talk of new long-term loan deal
EUROPEAN Central Bank policy makers played down market expectations that a new round of long-term loans is imminent despite president Mario Draghi indicating he was ready to provide funds to banks if needed.
"There has been no specific discussion on what the right instrument would be in case there would be a need for the ECB to act," executive board member Benoit Coeure said in Helsinki yesterday.
"There is a clear commitment by the governing council of the ECB to make sure the liquidity we issue will remain ample."
Mr Coeure's comments were echoed by Finnish central bank governor Erkki Liikanen, Austria's Ewald Nowotny and vice president Vitor Constancio. The officials said that while a discussion was taking place within the ECB, Mr Draghi's comment that he was ready to deploy another LTRO (long-term refinancing operation) if required didn't mean they were committed to action at the moment.
Excess liquidity in the financial system is approaching the €200bn level the Frankfurt-based central bank has previously signalled as a lower limit.
"It's important for us to remind everyone that there are instruments in our box to be used if the data will justify it," Mr Constancio said at an event in Madrid. "We aren't committed to any particular policy measures right now."
Mr Draghi added on Monday that the ECB was committed to keeping the cost of borrowing in the region in check as a fragile economic recovery takes hold, and is attentive to the effect that a reduction in stimulus in the US may have on money-market rates in Europe.
"We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money markets at the level that is warranted by our assessment of inflation in the medium term," Mr Draghi said.
The amount of spare cash in the financial system is dwindling as banks repay the three-year loans, helping to push up expectations of future borrowing costs this year as measured by Eonia forward rates. Those market rates have eased after the introduction of forward guidance on ECB interest rates in July and repeated pledges by officials to keep rates low.
Andrew Bosomworth, managing director of Pacific Investment Management Co, which runs the world's biggest bond fund, said the ECB could still be forced into action by the end of the year.
"We're looking at a very low growth profile in the eurozone," he said. "If that does initiate the need for a policy change, we're probably looking first of all at forward guidance – words are cheap, the ECB will try and talk rates down – and, failing that, another long-term refinancing operation, a two-year one at the December meeting." (Bloomberg)