FRANKFURT The European Central Bank's forward guidance on interest rates means that real interest rates for borrowers should fall as inflation rises and the ECB is ready to act if this does not happen, ECB policymaker Benoit Coeure said on Thursday.
"The Governing Council of the ECB expects interest rates to stay at present or lower levels for an extended period of time, while inflation should rise towards 2 percent over our projection horizon," Coeure said in the text of a speech for delivery in Paris.
"This implies that real interest rates for borrowers will progressively fall as inflation rises," he added. "And we stand ready to act if this scenario does not materialize."
Coeure expected the ECB's health check of banks across the euro zone to prompt corrective action to restructure banks and address capital shortfalls. This in turn would help the ECB's monetary policy gain traction across the bloc.
"Looking further ahead, I expect the downsizing of the banking sector to accelerate the development of alternative, capital market-based sources of finance, especially for smaller firms," he said.
"We are already seeing this playing out in some jurisdictions - for example, the 'mini bonds' scheme in Italy - and through initiatives, which the ECB supports, to revive European ABS markets."
Coeure called on European leaders to agree a single resolution mechanism (SRM) to close non-viable banks.
The resolution mechanism - still not finalized - is the second pillar of the banking union, which complements the unified banking supervision under the auspices of the ECB, together marking the most ambitious step towards closer European integration since the launch of the euro.
"If we fail to establish the SRM and SRF (single resolution fund), bank resolution will remain a national task, resulting in a misalignment of responsibilities, and entrenching the link between banks and sovereigns," he said.
(Writing by Paul Carrel; Editing by Sonya Hepinstall)