Stark says rates very low, support scale-down warranted

By @ibtimes on

The European Central Bank's interest rates are very low and its monetary policy stance has become more accommodative than at the peak of the financial crisis, ECB policymaker Juergen Stark said on Tuesday.

The ECB raised euro zone interest rates by a quarter of a percentage point to 1.25 percent last Thursday, ending almost two years of record low interest rates.

Stark said the ECB's non-standard policy measures -- liquidity injections and bond purchases -- are temporary and a return to more normal liquidity management and to a more moderate scale of central bank intermediation is warranted.

The ECB said in March it would carry on providing unlimited funding for banks at its three-month operations through to the end of June and would keep full allotment at its weekly and one-month operations, until at least Jul. 12.

As with the phasing-in of non-standard measures, there are no pre-defined steps between phasing them out and exiting from very low policy interest rates, Stark said. Non-standard measures can in fact co-exist with any interest rate level.

Two-thirds of the 62 economists polled by Reuters after last week's rate rise, which until last month would have shocked experts, expect another hike by July at the latest.

The ECB will adjust its policy interest rates and its provision of liquidity at a pace and to a degree commensurate with the evolution of risks to price stability and as appropriate to maintain an orderly and functional monetary policy transmission, Stark added, according to a text of the speech for delivery in Hong Kong.

Stark said the macroeconomic and financial landscape has fundamentally changed and the monetary policy stance has become more accommodative than at the peak of the crisis.

Turning to the ECB's operational framework, Stark said the central bank would stick to its principle of equal treatment of counterparties after the financial crisis. This framework also needed to be designed to contribute to a healthy banking sector.

The issue of how to tackle the problem of zombie banks that are cut out of inter-bank lending and have become dependent on ECB funds is being increasingly debated by policymakers.

(Reporting by James Pomfret, writing by Paul Carrel; Editing by Ruth Pitchford)

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