PARIS (MNI) – The European Central Bank’s efforts to pump liquidity
into the banking system have helped to forestall fire sales of bank
assets and are having a positive impact on the economy, according to ECB
Executive Board member Benoit Coeure.

“We have indications that the liquidity … is indeed flowing, or
will flow, between economic agents,” Coeure said in a speech delivered
Sunday in the United States and released by the ECB today. He was
referring to the central bank’s three-year LTRO in December, which added
nearly E500 billion to bank liquidity.

Coeure said there were “tentative signs of a stabilization” in the
euro area economy and that the ECB expected a recovery to occur “very
gradually in the course of 2012.”

He said there were no downward risks to price stability in the euro
area and that inflation would remain “above 2% for several months to
come, before declining to below 2%.”

The ECB’s refinancing rate is currently 1%, after cuts in November
and December of last year. In the speech, Coeure warned that a policy of
pushing rates to zero or below would pose dangers, particularly for the
interbank lending market.

“In theory, everybody would love to borrow at zero or negative
rates without going through the pain of finding a creditor happy to take
the opposite side of the transaction,” he said. “If the central bank
offers this service systematically, banks can dismantle their trading
platforms — which are costly to maintain — and become addicted to
central bank credit.”

Coeure said the benefits to the economy of a policy of zero or
negative interest rates would have to be weighed against the need to
allow money markets to operate normally.

“If a protracted period of zero or negative interest rates were to
be experienced in the euro area, it would be particularly important not
to lose the perspective, and the possibility, of restarting the
interbank market at a later stage,” he said.

“The intermediation role taken by the central bank cannot, and
should not forever take the place of money market activity.”

–Paris newsroom; +33142715540; jduffy@marketnews.com

[TOPICS: M$$CR$,M$$EC$,MGX$$$,M$X$$$]