ECB May Act Next Month Should Outlook Worsen

The European Central Bank could step in to address risks to growth as soon as next month, said Governing Council member Luc Coene. The reintroduction of longer-term bank loans, with maturities of 12 months or longer, is just one of the options currently under consideration by the central bank, said Coene in an interview in Washington late Thursday. Coene also did not rule out the possibility of an interest-rate cut, though he said it wouldn’t help to bring down longer-term borrowing costs.

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“If the data in early October shows that things are worse than we anticipated we will look at the kind of decisions we have to take for that,” said Coene. The Governing Council member’s comments come just as European leaders are considering expanding the 440 billion-euro European Financial Stability Facility so that it can continue to buy the debt of countries like Greece, Spain, and Italy, as well as aid troubled banks and offer credit lines. However, only six nations have ratified the measure so far.

The ECB has already reintroduced a six-month loan, and offers banks weekly, monthly, and three-month refinancing options, but has not conducted a 12-month loan in December 2009. Speaking of the possibility of a 12-month loan, Coene said, “We could perfectly do that when we feel there is an urgent need for that — I don’t think so for the moment, but it could be in two weeks.” The ECB next convenes on October 6.

Economists also predict the ECB will be forced to reverse course on interest rates, with the benchmark rate now at 1.5% compared to a near-zero rate for the U.S. Federal Reserve and Bank of Japan, and Bank of England’s 0.5% rate.

While European parliaments are debating over whether to increase EFSF funds, Coene says the ECB is unlikely to step up its bond purchase program, despite being called on by the International Monetary Fund to “continue to intervene strongly” in European debt markets earlier this week. “I think it has been a helpful element in the beginning but of course it cannot be a structural element of the system,” said Coene. “The main reason was that we wanted to keep the transmission of monetary policy as good as possible until the moment that the EFSF will be able to take over” the bond buying.

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The ECB restarted its purchase last month only after governments failed to convince investors they could solve the crisis. ECB Vice President Vitor Constancio said sustained bond purchases by the central bank would allow euro-zone countries to put off making necessary fiscal adjustments to shore up their budgets and decrease their deficits.