ECB's Knot: No need for action to bring down market rates

FRANKFURT Mon Jan 27, 2014 3:23am EST

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FRANKFURT Jan 27 (Reuters) - The European Central Bank is concerned about volatility in short-term interest rates, but not ready to engage in any policy action to counter it, Governing Council member Klaas Knot was quoted as saying.

Knot told news agency Bloomberg in a weekend interview that any future cuts in the ECB's main refinancing rate should be accompanied by taking the deposit rate negative, as narrowing the interest rate corridor would hamper interbank markets.

"Why we are seeing volatility is a bit of a puzzle for me," Knot, who heads the Dutch central bank, was quoted as saying in reference to short-term market rates.

"We would need to understand the drivers better before we could come to a conclusion this would warrant policy action."

Last week, overnight EONIA traded above the ECB's main refinancing rate (MRO), now 0.25 percent, for four sessions in a row. Higher market rates could hamper the euro zone economy's nascent recovery, and the ECB has said it is ready to ease further, if needed.

"If this were to become an issue of the monetary stance, then obviously conventional policy would be the response," Knot said. "If a need was felt to respond, then it would be logical to contemplate further rate cuts in the MRO and in that case also the deposit rate."

Knot noted that forward EONIA rates and longer maturity rates had remained more stable. Moreover, the rise in money-market rates was related to better functioning of the markets, which had resulted in lower excess liquidity, he said.

"It would need an adverse shock for further action to be taken. At this moment I don't see such a development."

At the same time, Knot confirmed the central bank's easing bias, saying the ECB was still far away from any scenario in which tightening could become a policy issue.

Knot also told Bloomberg that were the ECB to conduct any more very long-term refinancing operations (VLTRO), he favoured attaching conditions for banks taking the cash, but said there was no need for them at this point.

"As of today, I don't think funding stress is so acute that something like a VLTRO is on the radar screen," Knot said.

(Reporting by Sakari Suoninen; Editing by Catherine Evans)

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