December 15, 2008 / 10:03 AM / 11 years ago

UPDATE 2-ECB's Trichet says fiscal rules must be kept - FT

(Adds detail, WSJ report on bank lending guarantees)

LONDON, Dec 15 (Reuters) - European policymakers must not tear up the rule book when launching emergency economic rescue packages, European Central Bank President Jean-Claude Trichet said in an interview published in the Financial Times on Monday.

“We would destroy confidence if we blew up the stability and growth pact,” he said.

The pact sets rules on public deficits and debt levels.

Fiscal indiscipline could threaten already fragile economic confidence and increase the nervousness of capital markets about governments’ funding needs, Trichet told the newspaper.

European Union leaders on Friday backed plans for a stimulus package worth around 200 billion euros ($265 billion) in response to the worst financial crisis in 80 years.

Policymakers had a duty “to eliminate as completely as possible all the inbuilt elements in global finance that are amplifying the booms and the busts”, Trichet said.

Trichet also said the ECB was not currently considering buying government debt, despite his own recent comments that such a move was possible.

“Today, we will certainly not consider that it will be appropriate at all,” he said.

ECB member and Austrian central bank chief, Ewald Nowotny said a similar thing in an interview with Reuters last week. (For story please click [ID:nLA142303].

Buying back government debt is seen as one of the ways for central banks to combat deflation and recession once interest rates are close to zero.

The ECB’s benchmark interest rate is 2.5 percent.

The tactic was used by the Bank of Japan as it battled with deflation in the late 1990’s and early 00’s and the U.S. Federal Reserve, with U.S. rates now at 1.0 percent, has said it is looking at similar options.

Separately, in an unsourced report on Monday the Wall Street Journal said European policymakers were also considering guaranteeing short term interbank lending as one of the possible options to get interbank lending going again.

Last week ECB Executive Board member Gertrude Tumpel-Gugerell said the bank would look at any such proposals. (Reporting by Keith Weir and Marc Jones; Editing by Mike Peacock)

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