Constancio Says Any ECB Policy Package Would Have Clear Aim

Vitor Constancio said that any policies announced by the European Central Bank in June will complement each other.

“If a set of measures is taken -- it’s still to be decided next week -- they will all go into the same direction,” the ECB’s vice president said in an interview today after the institution published its Financial Stability Review. “The greatest concern we have as a central bank is indeed the possibility, the risk, that a prolonged period of low growth and inflation will create all kinds of risks.”

The recovery in the 18-nation euro region is struggling to gather pace amid subdued pricing power and weak credit. Bank lending has contracted for two years, potentially influencing ECB President Mario Draghi’s decision on whether to ease policy further to combat inflation that has been at less than half the central bank’s goal since October.

The ECB’s Governing Council meets on June 5 in Frankfurt to decide on monetary policy, four weeks after Draghi said officials are “dissatisfied” with the inflation outlook and “comfortable” with acting at their next meeting.

Executive Board member Yves Mersch said in Tokyo today that the central bank is working on a package of measures, which could include a negative deposit rate for the first time.

Comprehensive Assessment

“We have made public that we are comfortable acting with both conventional and unconventional measures and that we have room available,” he told reporters. “Above all, what we have been doing is to broaden our tool box and we will present some of the findings of this broadened tool box to the Governing Council.”

Constancio said the ECB’s ongoing health check of euro-area lenders will ease restrictions on credit. The central bank is reviewing balance sheets to identify capital shortfalls before it becomes the region’s supervisor in November.

“We can say with confidence that the Comprehensive Assessment will complete the repair of banks’ balance sheets,” he said at a press conference. “Credit-supply restrictions will be eliminated in Europe.”

In the meantime, increasing provision for impaired assets has weighed on the profitability of banks, Constancio said.

“After that process is completed, and it will be completed with the end of the Comprehensive Assessment, it means profitability will go up as a consequence, all other things being equal,” he said.

Bank lending is showing some signs of improvement. Credit supply to companies and households increased 0.2 percent in April from a month earlier, and the annual pace of contraction slowed to 1.8 percent from 2.2 percent, ECB data showed today.

“For next year, banks will be much better prepared to finance the economic recovery in Europe,” Constancio said. “The assessment of the present situation of financial stability is that it has improved. It’s not an immediate concern.”

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