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he head of Germany’s Bundesbank sees no need at present for the European Central Bank to make fresh long-term loans to banks and it will not deploy them simply because market interest rates have risen, he said in an interview with Reuters.
Jens Weidmann is widely seen as the most hawkish policymaker on the ECB’s 23-man Governing Council.
Market rates moved higher over the summer on expectations the US Federal Reserve would start unwinding its stimulus and the ECB is watching them closely, concerned that a sustained rise could threaten the eurozone’s fragile economic recovery.
The rise subsided after the Fed delayed a reduction in its bond purchases, but the early repayment of two previous long-term loans to banks, or LTROs, extended by the ECB in late 2011 and early 2012 is sucking “excess liquidity” out of the system and risks pushing up market rates.
“One cannot infer an automatic monetary policy reaction from a change in money market rates,” Weidmann told Reuters in an interview conducted on Monday and published yesterday. “There is no such automatism.”
“LTROs are only one of many possible instruments,” he added. “Which instrument we, if necessary, deploy, we will then have to discuss. But at the moment I see no need. We are always ready, if it is necessary, to act,” Weidmann said.
ECB experts are analysing the option of issuing LTROs.
The central bank deployed these cheap loans to inject over 1tn euros ($1.36tn) into the system soon after Mario Draghi took over as ECB president in November 2011 — a policy measure he has said “avoided a major, major credit crunch”.
New LTROs could be used to avoid what Draghi last week called a “liquidity accident” - banks running short of funds — but the ECB experts have yet to finish their work, which the Council will review before deciding whether to use the loans.
A new LTRO could aim to raise excess liquidity — the amount of money beyond what the banking system needs to function — and ease banks’ funding situation before the ECB’s asset quality review (AQR) next year, a precursor to its new supervisory role.
Excess liquidity has fallen to €222bn from over €800bn early last year, approaching a level expected to push market rates up and closer to the ECB’s main interest rate.
While the ECB was watching money market developments attentively, it did not have a concrete target for money market rates or the level of liquidity in the system, Weidmann said.
“Not every rise in money market rates undermines the ECB Council’s monetary policy stance. More important are the causes of the rise and how the rise is transferred to the finance system.”
“Under no circumstances should one try to replace the long-term capital market financing of banks with long-term refinancing operations (LTROs) or other monetary policy measures,” he added.
The ECB aims to begin its asset quality review of banks in the first quarter of next year and conclude it by the summer.
Looking out over Frankfurt’s financial district from the 12th floor of the Bundesbank’s headquarters, Weidmann said the AQR and accompanying stress tests could uncover a need for capital increases at some banks. “That applies to German banks too.”
Turning to the broader economic situation in the eurozone, the 45-year-old Bundesbank chief said: “The crisis is not yet over. There is a good stretch in front of us.”
Private and public debt in many eurozone countries remains too high, he said, and competitiveness must be improved.
“Here, there is need for action not just in the programme countries (receiving aid), but also big countries like France and Italy face challenges,” Weidmann said, adding that Germany too must face up to changes resulting from globalisation, demographic shifts and government debt.
Weidmann was confident that politicians in the US could agree on a solution to their budget problems.
President Barack Obama refused to give ground in a fiscal confrontation with Republicans on Tuesday, saying he would negotiate on budget issues only if they agree to re-open the federal government and raise the debt limit with no conditions.
“A short-term economic strain could result from the US government shutdown, but experience shows this can be made up for later,” Weidmann said.
Of the Federal Reserve’s pending exit from its monetary stimulus, he added: “The nervousness around the debate over the effects of an exit from unconventional US monetary policy shows some regions in the global economy are still vulnerable.”
“As the finance and sovereign debt crisis has not yet been overcome, the eurozone is also susceptible to setbacks.