UPDATE 1-ECB policymakers say banks must lend as loan demand picks up

Wed May 14, 2014 7:22am EDT

* Mersch, Praet point to gradual pick up in loan demand

* Urge banks to play role in recovery and provide credit

* ECB readying several instruments for June meeting

* Praet says tools could include long-term funding operation

* Mersch: ECB's actions not limited by pending OMT ruling (Adds comments from Mersch, Praet and detail)

By Annika Breidthardt

BERLIN, May 14 (Reuters) - Top European Central Bank policymakers highlighted on Wednesday the importance of banks being able to meet rising loan demand as the economy recovers, suggesting the ECB may consider another liquidity injection.

Executive Board member Yves Mersch said the ECB was readying several measures that could be used if it decides to take fresh policy action in June, while he and colleague Peter Praet both pointed to a gradual increase in demand for loans.

"What's on our minds is that demand for credit is rising again. This could lead to supply shortages," Mersch said at a conference, urging banks to play their part in the recovery and to give out loans.

Praet took a similar line in an interview with German weekly Die Zeit, in which he said the ECB was preparing a series of measures for the June meeting, including lending banks money for a longer time frame, possibly with conditions attached.

"It is very important for the recovery that banks also meet this (increasing loan) demand," he was quoted as saying.

The ECB injected more than 1 trillion euros into the banking system in late 2011 and early 2012 to ease banks' funding strains at the time. The loans mature early next year, but banks have already voluntarily paid back more than half of the funds.

The comments come after five people familiar with the plans told Reuters that the package the ECB is preparing for June includes measures targeted at small and medium-sized companies.

The euro zone's central bank may also cut interest rates, including imposing a negative deposit rate for the first time. That would mean banks parking cash at the ECB overnight rather than lending it out would have to pay a charge.

Whether the ECB will act in June will depend on updated ECB staff forecasts for inflation. If they show the outlook for price developments in the euro zone has deteriorated from March, more stimulus is likely.

"What exactly will happen is a decision that will be taken at the next council (meeting). There are several possibilities," Mersch said, adding that some were easier to implement than others and that there was perhaps already theoretical unanimity on various tools.

"We are working intensively to expand our independent instruments within our mandate and to make our action as effective as possible," he said. "We never precommit unconditionally."

ECB NOT LIMITED IN ITS ACTIONS

Earlier on Wednesday, Mersch said the ECB could buy sovereign debt in the secondary market as part of its as-yet unused bond purchase plan and was not limited in its actions by a pending European Court decision on the matter.

The ECB's Outright Monetary Transaction (OMT) programme, launched in September 2012, helped the ECB bring the euro zone back from the brink of collapse by promising potentially unlimited purchases of the sovereign bonds of member states.

The German constitutional court deferred a ruling on the legality of the programme to the European Court of Justice this year but said there was reason to think the OMT exceeded the ECB's mandate and violated a ban on funding governments.

Mersch said purchases of government bonds in the primary market were "explicitly not among" the instruments at the ECB's disposal to fulfill its mandate.

"Our mandate nevertheless includes the possibility of buying, under the appropriate conditions, government bonds on the secondary market should this be necessary from a monetary policy perspective."

(Reporting by Annika Breidthart; Writing by Eva Taylor; Editing by Catherine Evans)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.