Asmussen says ECB can cut rates, take other options

FRANKFURT Wed Oct 9, 2013 2:23pm BST

Executive Board Member of the European Central Bank (ECB), Jorg Asmussen speaks during the annual meeting of the German business newspaper Handelsblatt in Frankfurt September 4, 2013. REUTERS/Ralph Orlowski

Executive Board Member of the European Central Bank (ECB), Jorg Asmussen speaks during the annual meeting of the German business newspaper Handelsblatt in Frankfurt September 4, 2013.

Credit: Reuters/Ralph Orlowski

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FRANKFURT (Reuters) - The European Central Bank still has room to cut interest rates or use non-traditional measures to ease policy and aid the euro zone economy, ECB Executive Board member Joerg Asmussen said on Wednesday.

Non-standard options include offering banks more long-term loans, stopping mopping up funds to offset the ECB's bond purchases or reducing reserve requirements, he said.

While Asmussen said the ECB was watching money market rates closely, he also tempered expectations the euro zone's central bank will ease more in the immediate future, saying its current stance is in line with economic developments.

"On standard measures, which are the interest rates, there is still some room," Asmussen told broadcaster CNBC in an interview aired on Wednesday.

"We also have the whole array of non-standard measures left, from the famous LTRO to using reserve requirements to discontinuing the weekly absorption operation.

"So there is a whole range that we could in theory do. No decision has been made yet."

LTRO refers to offering banks long-term loans as the ECB did around the start of 2012, to give them funding security and encourage them to lend to households and businesses.

The ECB cut its interest rates to a record-low 0.5 percent in May. Asmussen was said to have been the only Governing Council member to vote against the cut.

ECB President Mario Draghi said the central bank discussed cutting rates further in its last meeting on October 2, but decided to leave them unchanged.

On Wednesday, Asmussen also said the ECB was keeping a close eye on the development of market interest rates and could step in if necessary. ECB policymakers have expressed worries that a rise in market rates could choke off a nascent recovery in the euro zone economy.

"We are looking at money market rates, especially Eonia, very closely," he said.

Money market rates started climbing in May after the U.S. Federal Reserve signalled it would begin to scale back its monthly stimulus. They have come down from levels reached in early September after the Fed surprisingly opted to keep its bond purchases unchanged last month.

The one-year, one-year forward Eonia rate - one of the most traded money market instruments, which shows where one-year euro rates are seen in a year's time - was at 0.35 percent on Wednesday, down from 0.56 percent in early September.

GRADUAL RECOVERY

Asmussen said recovery in the euro zone was building as the ECB had forecast and that current policy was appropriate.

"We think it will continue to be better next year," Asmussen said. "It's a very gradual recovery, but it's a recovery, so now monetary policy stance is in line with this development."

The ECB halved the reserve requirement - the amount of money commercial banks have to deposit at the central bank - to 1 percent from 2 percent in December 2011, freeing up about 100 billion euros for banks to use for other purposes.

The other option Asmussen named is that the ECB could stop taking weekly deposits to offset money injected into markets via its Securities Markets Programme bond-buying plan. The move would add 188 billion euros to money markets.

But any halt to this "sterilisation" of bond purchases, which was introduced to dampen inflation fears, could be unpopular in Asmussen's home country of Germany, where some politicians have viewed central bank activism with suspicion.

Both options would give banks an incentive to look for returns by investing their money elsewhere.

Asmussen also said the main reason for weak bank lending in the euro zone was that a cleanup of banks' balance-sheets had not been done swiftly enough.

With the euro near an eight-month high against the dollar, Asmussen stressed that while the ECB takes the impact of the euro exchange rate into account when assessing the euro zone's growth prospects, it does not have a specific target. The single currency is also near a two-year high on a trade-weighed basis.

"We always said, and this is unchanged, we don't have an exchange rate target at the ECB. The exchange rate factors in when we do our growth forecasts and our inflation forecasts, but we don't have an exchange rate target here," Asmussen said.

(Reporting by Eva Taylor and Sakari Suoninen; Editing by Catherine Evans)

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