ECB nowhere near exit from crisis measures - Draghi

MUNICH Wed Feb 27, 2013 7:29pm GMT

European Central Bank President Mario Draghi testifies before the Committee on Economic and Monetary Affairs at the European Parliament in Brussels February 18, 2013. REUTERS/Eric Vidal

European Central Bank President Mario Draghi testifies before the Committee on Economic and Monetary Affairs at the European Parliament in Brussels February 18, 2013.

Credit: Reuters/Eric Vidal

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MUNICH (Reuters) - The European Central Bank is not about to remove the crisis measures it deployed to help the ailing euro zone economy, the central bank's chief said on Wednesday.

"Our monetary policy remains accommodative," ECB President Mario Draghi said in the question-and-answer session after a speech at the Catholic Academy of Bavaria.

"We are far from having an exit in mind."

The euro pared gains against the dollar after the comments, dropping as low as $1.3083 after Draghi's remarks from about $1.3100 just before.

Draghi said, however, that the central bank's balance sheet, which has already come down from highs above 3 trillion euros (2.6 trillion pounds), could see "a natural shrinking" as banks pay back funds they do not need, and added that the ECB has plenty of instruments to rein in liquidity when needed.

Banks have started, on a voluntary basis, paying back the ECB's ultra-long term loans, one year after they took more than 1 trillion euros of those funds.

In addition to flooding the market with liquidity, the ECB has cut its main refinancing rate to a record low of 0.75 percent and started a yet-to-be activated bond-buying programme, dubbed Outright Monetary Transactions (OMT).

Draghi also said, in the speech, that financial markets in the euro zone are still not functioning well, with firms and consumers having difficulties obtaining bank loans in some countries.

The ECB is experiencing problems transmitting its record-low interest rates right across the currency bloc. Draghi said last week the bank's top priority is to enhance this transmission process as it tries to support the crisis-hit economy, and acknowledged on Wednesday that much remains to be done.

"While sovereign debt markets have improved, bank lending is still very fragmented across the euro area," Draghi said.

"Credit in some countries is still difficult to obtain. The benefits of the painful actions undertaken so far have not yet materialised."

RECOVERY SLOW

Draghi also said that the common currency bloc's economy is recovering only "very, very slowly", with gradual recovery starting in the second half of this year.

Even Draghi's cautious projections may prove too optimistic, the incoming chief of Germany's ZEW economic institute said earlier at a Reuters summit in Frankfurt, as there is "huge uncertainty" surrounding the European Central Bank's expectation for a gradual euro zone recovery due to fiscal tightening in the bloc.

Clemens Fuest said he expected the German economy to recover only slowly in the first quarter despite some positive sentiment readings including from the Mannheim-based ZEW economic think tank, where he takes over as chief on Friday.

"I think that uncertainty with regard to that is huge," he said. "The forecast for fiscal policy is that it will be extremely contractionary in most countries. Is that compatible with recovery? I can't see it."

Draghi added that the central bank expects next year's inflation to come "significantly" below 2 percent, which means that the central bank, within its mandate, has room for additional easing.

The ECB targets inflation of below, but close to 2 percent.

Finally, Draghi said the policy differences between the ECB and the German Bundesbank were not that big and are being overplayed.

(Reporting by Sakari Suoninen and Jens Hack; editing by Ron Askew)

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