* 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 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."
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
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