ECB’s Liikanen Says Markets Understand Exit Strategy
European Central Bank council member Erkki Liikanen said investors have understood that withdrawing emergency measures next year doesn’t mean the ECB will immediately tighten monetary policy.
“Minor changes in the range of liquidity measures are in no way a signal of our monetary policy stance,” Liikanen, 59, who also heads the Bank of Finland, said in a Dec. 11 interview in Helsinki. “It’s been very well understood. So I’m not concerned.”
The ECB, which has been lending banks as much money as they want for up to a year at its benchmark interest rate, is starting to pull back on its emergency measures as financial markets recover from the worst crisis since the Great Depression. It has said this month’s 12-month tender will be the last and has tightened the terms of the loans.
Liikanen said the operations have “had a major role to play” in helping banks cope with the crisis, though they won’t be needed “the same way after this one.” It’s “up to the market to decide” how much cash banks will borrow, he said.
Demand at the Dec. 15 operation may increase to 150 billion euros ($220 billion) from the 75.2 billion euros loaned in September, according to a Bloomberg News survey this month. That’s less than half the 442 billion euros allotted in the first tender in June.
Tenders
The euro was little changed after Liikanen’s comments, trading at $1.4672 at 8:08 a.m. in London. The yield on the German two-year government bond was also little changed at 1.265 percent.
The ECB decided on Dec. 3 to index the rate on the 12-month loans to the bank’s benchmark rate over the period instead of fixing it at 1 percent. It will discontinue its six-month loans at the end of the first quarter and guaranteed unlimited funding in its regular seven-day refinancing operations “at least until” April 13 payday loan.
Liikanen said the ECB will continue with fixed rates on the regular operations “for as long as is needed.” He said that the bank’s benchmark rate, which is at a record low 1 percent, is “appropriate” for now.
Since May, the ECB has bought 26.7 billion euros of covered bonds, and Liikanen said it will complete the plan to buy 60 billion euros. The program has been “very successful,” he said. The ECB this month increased its forecast for 2010 euro- area economic growth to 0.8 percent from 0.2 percent. Growth will accelerate to 1.2 percent in 2011, it said.
‘Slow and Shaky’
“It’s very clear still that there won’t be any easy and rapid recovery in the world economy,” Liikanen said. “We have come through a major financial crisis, and always after a financial crisis the recovery is slow and shaky and that is where we are now.”
Euro-area medium-term inflation expectations are “well anchored, and in line with our price stability definition,” he said. The ECB, which aims to keep inflation just below 2 percent, sees average consumer-price growth of 1.3 percent next year and 1.4 percent in 2011.
Liikanen said the proposed European Systemic Risk Board, a supervisory body which will warn of dangers to the financial system, will help prevent future crises by monitoring risks such as rising asset prices, “very strong” credit expansion and excessive leverage.
“Macroeconomic risks are created in the boom — the economies are growing very fast on the basis of creating debt,” Liikanen said. “The major issue is, what do you do to act before they are bust?”
Filed under: economics by TheDoor