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UPDATE 1-Easy ECB policy necessary to stimulate economy -Liikanen
October 6, 2016 / 8:26 AM / a year ago

UPDATE 1-Easy ECB policy necessary to stimulate economy -Liikanen

(Adds detail, quotes)

HELSINKI, Oct 6 (Reuters) - The European Central Bank’s ultra-easy monetary policy of low interest rates and aggressive bond buying is necessary to support the euro zone’s economy, ECB rate setter Erkki Liikanen said on Thursday.

Bond markets have been rattled by speculation the ECB might reduce the pace of its bond purchases, currently at 80 billion euros ($89.54 billion) per month, although the central bank says that has not been discussed by its policymakers.

Governing Council member and Finnish central bank governor Liikanen said the ECB’s policy was needed and concerns that it is fuelling asset-price bubbles and squeezing bank profits in some regions should be tackled by other means.

“In order to support the economy and bring inflation back to its target, (the) monetary policy stance has been accommodative,” the Finnish central bank’s governor said at an event. “This is the backdrop against which the current low interest rates and the use of unconventional monetary policy measures are necessary.”

Finland’s economy has been in the doldrums for the past decade, hit by a series of factors including the decline of Nokia’s former phone business, a recession in neighbouring Russia and high labour costs.

The ECB has said its bond purchases are set to continue at least until March 2017 and the bank is looking at ways to ensure they can carry on smoothly amid concerns about a scarcity of bonds to buy in Germany and other countries.

Liikanen acknowledged that ECB bond buying was pushing investors to seek returns elsewhere, potentially inflating the prices of some assets, but argued that any excess should be tackled through specific “macro-prudential” measures.

These include typically include limits on mortgage lending, aimed at avoiding property bubbles, and restrictions on how much risk financial institutions can take on.

“Macroprudential tools are the key policy instruments in this regard,” Liikanen said.

Echoing recent comments by senior ECB board members, Liikanen noted that bank margins were suffering as a result of the ECB’s low interest rates, but said it was the lenders’ job to adapt to the new reality.

“Low rates support the real economy... which directly supports banks’ profits,” Liikanen said. “It is also up to banks themselves to adjust their business models to maintain their profitability in the changing environment.” ($1 = 0.8935 euros) (Reporting by Jussi Rosendahl; Writing by Francesco Canepa in Frankfurt; Editing by Catherine Evans)

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