Sat, Jan 14, 2012 - Page 10 News List

ECB sees ‘substantial’ effect from cheap loans

Reuters, FRANKFURT

The European Central Bank (ECB) said on Thursday that its flood of cheap three-year loans is helping banks and supporting morale across the eurozone, but it still left the door open to further interest rates cuts.

The bank also said that eurozone economy was showing some signs of stabilization in activity deep down, although it faced risks.

The ECB left rates on hold at 1 percent at its first policy meeting of this year, pausing to assess the impact of back-to-back cuts and a slew of other measures it took late last year that are showing signs of helping fight the eurozone crisis.

European Central Bank President Mario Draghi told a news conference the first of two three-year cheap funding operations the ECB announced last month was helping and that a second chance to borrow next month should also prove popular.

“The extensive recourse to the first three-year refinancing operation indicates that our non-standard policy measures are providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence,” Draghi told a post-meeting news conference.

His comments on seeing tentative signs on stabilization in the economy after the record liquidity offer boosted the euro.

To help fight the eurozone crisis, the ECB provided banks last month with nearly half a trillion euros of cheap three-year money.

French President Nicolas Sarkozy has urged banks to use the loans to buy sovereign bonds of eurozone strugglers and strong debt auctions in Spain and Italy on Thursday suggested some may be doing that, with analysts saying abundant liquidity helped support demand.

However, banks remain very reluctant to lend to each other, so the ECB’s action has helped keep the system working although there is less evidence that the money is making its way into the real economy.

Commercial banks’ overnight deposits at the ECB have hit successive all-time highs since the three-year funds were dispersed, though Draghi said there were some signs the money was finding its way into the economy.

“The more time passes ... the more we see signs it has been an effective policy measure,” he said. “This decision has prevented a credit contraction that would have been ... much, much more serious.”

“By and large, the banks that have borrowed the money from the ECB are not the same [as those] that are redepositing the money with the deposit facility of the ECB,” Draghi added.

He also said the bank still stood “ready to act” again on rates.

“This suggests that the ECB could cut rates further to 0.75 percent if financial tensions were to escalate,” Berenberg bank economist Holger Schmieding said. “The ECB identified such tensions as the major risk to the economic outlook.”

The ECB’s decision to leave rates on hold after cuts in November and last month — taken unanimously — was in line with market expectations.

“[The] monetary stance remains and will remain accommodative ... Uncertainty is very high and we will monitor all the developments and will stand ready to act,” Draghi said.

He declined to label 1 percent as a floor for ECB rates.

Analysts also highlighted Draghi’s use in his opening statement of the phrase “a very thorough analysis of all incoming data and developments over the period ahead is warranted,” which they said could allow for further rate cuts.

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