European Central Bank Executive Board member Benoit Coeure said liquidity measures aimed at averting a credit-crunch in the euro area should cease when economic and market conditions permit.
“All the tools necessary for large-scale liquidity withdrawal are already in place or will be readily available when needed,” Coeure said, according to comments prepared for a speech in Tokyo today. “Monetary policy accommodation for prolonged periods of time might fuel excessive risk-taking, leverage and asset price bubbles.”
The Frankfurt-based ECB has extended more than 1 trillion euros ($1.3 trillion) of three-year loans since December, as the effects of Europe’s sovereign-debt crisis threatened to cause a credit crunch. Concerns over inflation and risks accruing on the central bank’s balance sheet have prompted policy makers including Germany’s Jens Weidmann to urge that the measures be wound down as soon as is practicable.
“We have also given banks the option of reversing the long-term repurchase operation in advance, after one year, if the conditions that had warranted the long maturity of central bank credit are no longer in place,” Coeure said.
“In crisis times, as markets ceased to transmit price signals, our tools had to change,” Coeure said. “All non- standard measures have been temporary and tailored to the special features of the euro area. Our tools have changed but our strategy has not -- it is in fact supporting a gradual process of normalization.”
Coeure added the euro area’s new fiscal compact and “six- pack” initiatives, aimed at anchoring budgetary rules in national law and strengthening surveillance, should be “promptly ratified.”
In addition to shoring-up budgetary rules, Coeure said programs aimed at fostering economic growth “will be welcome, insofar as they address the long-term growth potential.”
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