September 23, 2013 / 2:11 PM / in 6 years

Draghi: ECB could offer LTRO to keep rates low, if needed

BRUSSELS (Reuters) - The European Central Bank is ready to offer banks more long-term loans to keep money-market interest rates from rising to levels which could push inflation too low, ECB President Mario Draghi said on Monday.

Speaking at the European Parliament, he also said that credit volumes are not yet showing the effect of the improvement in banks’ funding conditions, adding that the 17-country bloc’s central bank remains committed to keeping interest rates low for as long as necessary.

Draghi, who has committed the bank to taking further action if need be to keep market interest rates low, mentioned another long-term refinancing operation (LTRO) as an option to push down money market interest rates if needed.

The ECB was paying close attention to the lower level of additional funds in the banking system resulting from repayments of emergency funding by banks, Draghi said.

“We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money market rates at a level which is warranted by our assessment of inflation in the medium-term,” Draghi told the European Parliament in his quarterly testimony.

He said that banks paying back loans they have taken from the ECB could also result in higher market rates.

“While repayment of central bank credit is certainly a sign of normalization, the resulting reduction in excess liquidity can reinforce upward pressures on term money market rates,” Draghi told the parliament.

“We will remain particularly attentive to the implications that these developments may have for the stance of monetary policy.”

Draghi did not detail what the central bank could do to ensure high take-up, were it to decide to offer banks more long-term loans. Analysts have noted that measures such as guaranteeing that the loan interest rate would not rise during the operation would be one option.

Or it could choose to offer loans for some purposes at more favorable terms. Minutes of a July meeting of the ECB’s Bond Market Contact Group, comprising ECB staff and finance experts, show it discussed “creating a special 3-year LTRO similar to the Bank of England’s Funding for Lending Scheme where cheaper funding would be provided to banks”.

In late 2011, early in his term as ECB president, Draghi acted to ensure banks had access to funds as interbank markets were drying up due to a lack of confidence.

The ECB funneled over a trillion euros to banks with twin three-year liquidity operations, lifting excess liquidity to more than 800 billion euros early last year.

European Central Bank (ECB) President Mario Draghi waits for the start of the European Parliament's Economic and Monetary Affairs Committee meeting in Brussels September 23, 2013. REUTERS/Yves Herman

Early repayment of those loans has cut excess liquidity to some 225 billion euros - not far from the 200 billion level the ECB has said may be the point when market rates start edging up toward its main refinancing rate, now at 0.5 percent.

At the same time, Draghi said the central bank was watching the impact of having interest rates very low for a long time, saying the central bank was “very sensitive” to risks to financial stability stemming from low rates, and would act against those risks, if needed.

Turning to Greece, Draghi said that the country’s debt load was currently sustainable, but added it was too early to say whether it would need more aid. This would depend on factors such as it having access to capital markets.

Reporting by Martin Santa, writing by Sakari Suoninen; editing by Patrick Graham

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