European Central Bank policy makers played down market expectations that a new round of long-term loans is imminent, even after President Mario Draghi indicated that he’s 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 at an event at the Bank of Finland in Helsinki today. “There is a clear commitment by the governing council of the ECB to make sure the liquidity we issue will remain ample.”
Coeure’s comments were echoed today by Finnish central bank governor Erkki Liikanen, Austria’s Ewald Nowotny and Vice President Vitor Constancio. The officials said that while a discussion is taking place within the ECB, Mario Draghi’s comment yesterday that he’s ready to deploy another LTRO if required didn’t mean they’re committed to action at the moment. Excess liquidity in the financial system is approaching the 200 billion-euro ($270 billion) level the Frankfurt-based central bank has previously signaled 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,” Constancio said at an event in Madrid. “We aren’t committed to any particular policy measures right now.”
The euro fell yesterday and euro-area government debt, including German bunds, rose after Draghi’s comments. As a credit crunch in the 17-nation euro area loomed at the end of 2011, the ECB offered banks as much cash as they needed for up to three years, repeating the offer in early 2012. More than 1 trillion euros was injected into the financial system.
In Brussels yesterday, Draghi said the ECB is 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 U.S. 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,” Draghi said in response to questions from members of the European Parliament.
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, told Bloomberg TV today that 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 euro zone,” 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.”
The ECB forecasts an economic contraction of 0.4 percent in the euro area this year and growth of 1 percent in 2014, while it expects inflation to average 1.5 percent and 1.3 percent, respectively. Nowotny said today that while the need for liquidity injections is falling, the ECB retains the ability to step in.
“It’s important to show that that we have all instruments available, and they are flexible,” Nowotny said at an event in Vienna. A further LTRO “is a discussion we are having and will have in the ECB,” he said.
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