ECB's Praet says limited room to cut rates - paper

FRANKFURT Tue Dec 11, 2012 6:43pm GMT

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FRANKFURT (Reuters) - European Central Bank Chief Economist Peter Praet said there is little room to cut interest rates below the current record low of 0.75 percent and that the ECB should instead focus on making sure these rates reach the real economy.

The ECB kept rates on hold at its December policy meeting because inflation expectations had not changed significantly despite weakening growth prospects, but Governing Council members also discussed cutting rates at the meeting.

In an interview with the Wall Street Journal, Praet said the main issue was that the low interest rates were not filtering through to the real economy, but the situation was beginning to improve and there was currently no need for further ECB action.

"We don't see a need to come up now with new measures," Praet was quoted as saying on Tuesday.

"There is little margin of manoeuvre," Praet said. "We are already at very low interest-rate levels."

"I believe we should continue to focus on ensuring the effectiveness of monetary policy. The monetary policy stance is already very accommodative. Interest rates cannot do much to address these issues."

Asked about cutting the rate banks get for parking funds at the ECB overnight into negative territory, Praet said the ECB was "technically ready" to do so, but there were also risks.

"The experience shows you have to be careful when you go into negative rates, especially the effect on bank lending conditions. This reflection is going on," Praet said.

The ECB's promise to do what it takes to preserve the euro has helped to calm financial markets, bringing down borrowing costs for Spain and Italy, two countries which are seen as likely to tap the ECB's new government bond purchase programme.

It was up to governments to decide whether to a bailout, which would pave the way for ECB bond market intervention, but Praet said if it was up to him, he would make such a step in quiet times rather than times of stress.

"If I had to take the decision it would be better to take it in quiet times than under stress," Praet said.

(Reporting By Eva Kuehnen; editing by Ron Askew)

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