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ECB has discussed new LTRO but current policy mix fine - Hansson
September 11, 2013 / 5:00 PM / 4 years ago

ECB has discussed new LTRO but current policy mix fine - Hansson

TALLINN (Reuters) - Offering more long-term loans to banks is on the table as a tool for the European Central Bank to steer down market rates and help boost the euro zone economy, ECB Governing Council member Ardo Hansson said on Wednesday.

A supporter of the euro critic's party 'Alternative fuer Deutschland' (AFD) (Alternative for Germany) holds a placard reading "Yes for Germany, no to a debt union" in front of the euro sign landmark outside the headquarters of the European Central Bank (ECB) prior to the ECB's monthly press conference in Frankfurt September 5, 2013. REUTERS/Kai Pfaffenbach

But in an interview with Reuters, Hansson, who heads Estonia’s central bank, said the ECB’s current policy mix was appropriate.

“It (LTRO) has been discussed as an option on the table,” Hansson said. “So far the package we have right now, I think, seems appropriate.”

“In terms of policy options ... I would not say we are running out of them,” Hansson added. “You can keep fixed or lower all of the key policy rates.”

He said price stability was the ECB’s main priority and that it should not try and immediately counter moves in money markets that may be based on supply and demand.

Market interest rates have remained relatively high despite the ECB offering “forward guidance” that rates will be kept low. That reflects expectations the U.S. Federal Reserve will soon start unwinding its stimulus measures and stronger-than-expected economic data in the 17-member euro zone.

Expectations about the ECB’s rate moves are not the only factor at play in determining market interest rates. Their rise is also influenced by dwindling excess liquidity - the level of cash beyond what banks need to cover day-to-day operations.

Another ultra-long term funding operation, or LTRO, could help counter the tightening liquidity situation.

The ECB funnelled over a trillion euros to banks with twin three-year liquidity operations in late 2011 and early 2012, lifting excess liquidity to more than 800 billion euros.

Early repayment of those loans has cut excess liquidity to some 250 billion euros - not far from the 200 billion euro level the ECB has said may mark the point at which market rates start edging up toward its main refinancing rate, now at 0.5 percent.

But the repayments are making the central bank’s monetary policy less accommodative, and it may be forced to counter this quiet tightening by other means.

“It is not only your forward guidance,” said Hansson.

”The money market is a market determined by all kinds of factors, only one of which is what we may do ourselves in terms of policy. Supply and demand factors also play a role and shouldn’t be resisted.

“It isn’t something that one should try to immediately counter ... It all has to filter into the assessment of the price stability impacts,” he added.

Hansson said he did not believe money market rates had ignored ECB moves.

“I wouldn’t say it has been shrugging off, because there is an awful lot of things going on. (I am) generally pretty happy with the way this has gone if you think of the range of possible outcomes. It has (had) a lot of the intended effect.”


Hansson warned of complacency about the euro zone economy, which is forecast to contract 0.4 percent this year, but grow by 1.0 percent next year.

“The balance of risks remains on the downside,” Hansson said. “It’s more likely you have slightly negative developments than slightly positive ones.”

“But the bigger risks are much reduced,” he added, referring to any broader loss of confidence in the euro currency or a euro zone member. The bloc’s sovereign debt crisis, now in its fourth year, has eased but continues to rumble, with fresh political uncertainty pushing Italy into renewed focus.

ECB Governing Council member Luc Coene said on Wednesday that bailed-out Greece will need further help at least once and possibly twice more.

Asked about Greece, Hansson said: “It doesn’t mean necessarily if you have a successor programme, it does not necessarily equate to a bailout. Its means providing some liquidity, financing near market terms. Those are always possibilities.”

International lenders estimate Greece will need around 10-11 billion euros from the second half of 2014, although several euro zone governments are reluctant to extend further loans because of negative public opinion.

Hansson expressed scepticism whether the ECB should join other major central banks and publish minutes of policy meetings - a possibility due to be discussed by the bank.

“In a European context, it’s a bit of challenge,” Hansson said, adding that he had not made a decision yet on the issue.

”On the one hand, it’s good to give that information. On the other hand, on taking these decisions we all should be able to take them from a pan-European perspective.

“If this kind of a move would lead to more pressure to take a more national position then it might defeat the purpose.”

Editing by Catherine Evans

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