July 9, 2012 / 5:12 PM / 6 years ago

Draghi keeps door open to further ECB rate cuts

BRUSSELS (Reuters) - European Central Bank President Mario Draghi kept the door open on Monday to further interest rate cuts, saying any decision on further action would depend on economic data.

European Central Bank (ECB) President Mario Draghi (C) arrives to testify before the European Parliament's Economic and Monetary Affairs Committee in Brussels July 9, 2012. REUTERS/Francois Lenoir

He also urged countries not to let up on efforts to balance their budgets even though savings measures can cause “social tensions”, and said that governments should be involved in any bank resolution where taxpayer money is involved.

The ECB cut its key policy rate to a record low 0.75 percent last week to shore up the euro zone economy which is on the brink of recession, with even powerhouse Germany showing some signs of weakness.

“We have to look at what the situation is, look at the data and the developments and then we’ll make up our minds in the Governing Council about what next actions we’ll do,” Draghi told the European Parliament when asked whether the ECB could continue reducing rates.

Even at 0.75 percent, the ECB’s main interest rate is higher than that of any of the other four leading central banks.

ECB Executive Board member Peter Praet said in Lisbon that while very low rates create problems if they are in place for a long period of time, there was no “taboo” on interest rates, implying that the bank had not ruled out additional rate cuts.

Praet said the current crisis was more profound than that in 2008, when the shock collapse of Lehman Brothers prompted credit markets to seize up globally.

“The Lehman bankruptcy in 2008 revealed the fragility of the financial system ... At the time it was mostly the securitization industry that was criticized, but now it (the crisis) is much more profound, it is not about the distribution model anymore, it is much more fundamental,” Praet told a conference on Monday.

He singled out the case of the euro zone’s fourth-largest economy Spain, which is now firmly in the firing line as investors fear it may need a full bailout, saying its expansionary policy in 2009 was based on “wrong assumptions and illusory revenue projections”.

Draghi said last week that current situation was “definitely not” as bad as after Lehman Brothers collapsed.

Turning to measures to wind down failing banks, Draghi said on Monday that national governments would have to be involved if the failure has budget impact.

He also said that the European bailout fund ESM would not be ready to recapitalize solvent, but illiquid banks by end of the year, but assured that the process was moving as fast as possible.

EU leaders at their summit last month decided that up to 100 billion euros would be made available to fund Spanish banks.


Draghi also rejected arguments that the ECB should force banks to lend to companies in the private sector. Telling banks what to do with the 1 trillion euros they took in three-year loans from the central banks would be neither possible nor desirable, he said.

The ECB also reduced its deposit rate to zero last Thursday, meaning that banks do not receive any interest at all for the funds that they place at the bank’s the overnight deposit facility.

Recently, banks have placed around 800 billion euros there and the ECB hopes that having rates at zero would encourage banks to lend to each other rather than just parking the money at the central bank.

ECB Governing Council member Ewald Nowotny, also speaking on Monday, said that cutting the deposit rate further would probably have little effect.

Draghi said that debt-ridden euro zone countries should stick to the programs they have agreed with the EU, IMF and the ECB, even if the savings measures cause “social tensions”.

Early in the sovereign debt crisis, countries had sought to balance budgets by increasing taxes instead of cutting spending, which was the wrong way to go about it, he said.

He also repeated that he saw the euro zone economy starting to recover by the end of this year and that inflation would fall to the ECB’s target of just below 2 percent next year, adding that people should not be too pessimistic.

Praet said agreements made at last month’s European summit were “an important step”, but added that there was “still a number of different views” about the speed of their implementation.

He said Europe needed to make progress on fiscal union before choosing a model of banking supervision.

The ECB’s injections of long-term liquidity known as LTRO’s had helped to considerably reduce funding fears around major financial institutions, but that “does not mean you solved all problems”, Praet said.

Central banks could not assume the task of improving competitiveness in the euro zone and countries had to enact structural reforms, he said.

Additional reporting by Sergio Goncalves and Daniel Alvarenga,in Lisbon; Writing by Sakari Suoninen and Marc Jones; editing by Susan Fenton

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