Tuesday, the European Central Bank Governing Council member Ewald Nowotny said the central bank would take all available measures to stabilize the inflationary expectations in the euro area and keep them anchored in the positive terrain. Nowotny is also the Governor of the Austrian central bank.
Nowotny said We will keep the interest rate very low for as long a time as is required, and we stand ready to use unconventional measures of quantitative easing to assure European firms and consumers access to credit at appropriate conditions.
Nowotny also added that he doesn't foresee deflation in the euro area.
Every single institution that can create the kind of trouble a failing bank creates should be regulated like a bank, he said. Highly leveraged institutions such as hedge funds need to be regulated.
As for fiscal policy, the necessity of a large and timely stimulus package is most obvious, Nowotny said. Though the automatic stabilizers in most European nations assisted to adjust the loss in effective demand, some additional discretionary spending is now required.
According to Nowotny, policymakers are confronted with two main tasks. On the one side, they must restore stability in financial markets by bringing back liquidity, recapitalizing banks and getting toxic assets off banks' balance sheets. The second task is to fight the global recession and prevent it from turning into a lasting depression.
Last week, in an interview to the business daily Nikkei, the ECB President Jean-Claude Trichet said the central bank is considering additional monetary easing measures to support the economy and Europe will see a gradual recovery in 2010 after experiencing exceptionally challenging situations in the current year.
In April, the central bank had lowered the main refinancing operations by a quarter percentage point to an all-time low of 1.25%. The ECB has lowered a total of three full percentage points since early October 2008.
Economists now expect the central bank to cut the main refinancing rate to 1% in early May. Earlier in April, ECB's Governing Council member, Axel Weber said there is still a little room to cut the main refinancing rate, but it should not go below 1%. If the interest rate falls below 1%, banks will have no incentive to lend to each other, paralyzing interbank lending, Weber added.
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