UPDATE 2-ECB will know by year-end if latest measures work -Constancio

Fri Jun 6, 2014 9:46am EDT

* ECB will know by December if latest measures successful

* Asset purchases to be used if deflation threatens

* Expects big take up for new batch of cheap loans (Combines stories, adds quotes, details)

By Marc Jones and Francesco Canepa

LONDON, June 6 (Reuters) - The ECB will probably not know until the end of the year, after banks have had the chance to get their hands on its cheap loans, whether its actions on Thursday have been effective, its vice-president said on Friday.

Vitor Constancio also said the European Central Bank could launch a broad asset purchase programme like those seen in the United States, Britain and Japan if the bold measures to spur growth and fend off threatened deflation fail to gain traction.

"Only after the second tranche in December of the initial allowance of the new facility will we then gauge the impact, because by then the comprehensive assessment (AQR) will be completed and banks will know what is their situation," he said.

The ultra-cheap four-year cheap loans, announced on Thursday alongside a rate cut and a charge on spare cash parked at the ECB, are intended to encourage banks to increase lending to the smaller firms that are the bloc's economic backbone. Many banks have been holding back credit ahead of the ECB's review of their asset quality (AQR) later this year.

Take-up of the 400 billion euro ($545 billion) refinancing scheme will depend on banks but Constancio said he hoped incentives in the plan would fuel strong demand.

"I hope there will be a significant take up. I would not put any number except that the maximum could be 400 billion (euros) for the first initial allowance."

OPEN DOOR

The central bank for the 18 countries that use the euro has left the door open for further action should inflation expectations start falling or if the economy suffers a shock.

"For the type of contingencies and challenges we face now, what we did, we think is enough. If some downward shock were to create a much deteriorated situation then we will have to think about all sorts of unconventional policies," Constancio said on the sidelines of an IIF conference in London.

"In that circumstance we would have to contemplate the use of a broader programme of asset purchases.

Earlier, he had told a question and answer session: "If we see a sort of vicious circle emerge out of (low)inflation and an unanchoring of expectations and an outward shock that would create a reverse spiral, that would require a broad programme of asset purchases."

With financial market-derived medium-term inflation expectations still near to 2 percent, however, Constancio said any large scale bond buying was still some way away.

Speaking at the Q&A, the ECB vice president said interest rates would remain at current record low levels as the euro zone needed inflation and growth rates to rise to help reduce a regional debt overhang.

Its main rate is now just 0.15 percent, while its deposit rate is in negative territory at -0.1 percent, which effectively sees banks pay to keep cash with the ECB overnight.

"Interest rates will stay low, in this case stable, for an extended period of time," Constancio added. (Reporting by Marc Jones and Francesco Canepa; Editing by Catherine Evans)

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