Dow Jones Newswires
Top European Central Bank executives Friday suggested they may answer calls to ease monetary conditions in the euro zone, as risks to the financial system intensify and the bloc braces for elections in Greece this weekend that could decide the country’s future in the common currency.
ECB President Mario Draghi told a conference in Frankfurt the ECB would continue its “crucial role” of providing liquidity to sound banks against appropriate collateral. He said inflation expectations in the euro zone were well anchored and that there were no inflationary threats.
Providing liquidity “is what we have done throughout the crisis, faithful to our mandate of maintaining price stability over the medium term, and this is what we will continue to do,” Mr. Draghi said. The Eurosystem, the ECB and the 17 national central banks that use the single currency “will continue to supply liquidity to solvent banks where needed,” he added.
ECB Executive Board member Peter Praet, often referred to as the ECB’s ‘chief economist,’ confirmed that view at the same conference, saying despite the massive amount of liquidity the ECB has injected into the banking system, including more than EUR1 trillion through its three-year loans, there are no asset price bubbles forming anywhere in the currency bloc.
“The surplus of central bank liquidity in banks in financially-stronger countries has raised concerns that such liquidity could fuel asset price bubbles in parts of the euro area, potentially posing a threat to price stability. These concerns are not warranted at the current juncture,” Mr. Praet said.
The comments indicate the ECB sees no threat to its mandate of maintaining inflation at a level of less but close to 2% in the medium term.
Mr. Praet noted that the ECB will continue to closely monitor asset prices and Mr. Draghi said the ECB has all possible tools needed to mop up any excess money should it see a threat to its prime mandate.
Analysts said the comments suggest the ECB is leaving the door open for policy easing.
“In a nutshell, Draghi suggests that the ECB is ready to act, but the move seems to be conditional [upon] structural changes, as often repeated since the start of the debt crisis,” Newedge economist Annalisa Piazza said in a research note.
The ECB left its main interest rate on hold at a low of 1% last week, but Mr. Draghi conceded that a few members of the central bank’s governing council wanted to cut rates, implying that lower rates may be on the horizon.
Mr. Praet noted in his opening remarks that “the ECB, as an organization, is capable of taking decisions quite rapidly, which is in a very big contrast with other European institutions. That’s something that we shouldn’t forget.”
Repeat elections in Greece over the weekend may result in the country being forced from the euro zone. Its banks borrowed ?62.02 billion ($78.32 billion) from the ECB in April, data showed earlier this week. The country is receiving emergency international funding to keep its economy afloat, subject to its meeting harsh cost-cutting conditions.
Should financial market strains worsen in wake of the vote, people in the market expect the ECB to act quickly with further measures to keep a possible spread of the region’s sovereign-debt crisis at bay.
Fears that Greece’s economic turmoil could further damage vulnerable economies in the euro zone have pushed Spanish and Italian borrowing costs to record highs in recent days. Spain’s 10-year borrowing rates hovered around 7% on Thursday; Greece, Portugal and Ireland requested bailout assistance when their funding costs surpassed similar levels.
The Institute of International Finance, a global association of financial firms, has said Greece’s emergency bailout-program targets should be relaxed and that the country might need between ?20 billion and ?30 billion more in financial aid. Greece has already received two international bailouts over the past two years.
Both central bankers stressed that ECB steps cannot substitute the need for government action and called for euro-zone countries to “surrender more sovereignty” on a way toward more coordination.
“At some point, when supranational institutions and processes continually gain influence, the need for greater political legitimacy becomes more and more pressing,” Mr. Draghi said.
“It is an illusion to think that, in an integrated world, countries will be able to decouple themselves from developments in other countries,” Mr. Praet said.
The comments come as Mr. Draghi and other European policy makers work together to map out a vision for the future of Europe ahead of a meeting of EU leaders at the end of this month. He said details on this will be released soon.