FRANKFURT (MNI) – The inflexible pursuit of price stability is even
more important in times of crisis, European Central Bank Executive Board
member Jose Manuel Gonzalez-Paramo said Thursday at a meeting of Asian
and Latin American central bank officials in Kuala Lumpur.

“It is the view of the ECB that the role of a central bank under
any circumstances, and in crisis times in particular, is to inflexibly
pursue its main objective, which in the ECB’s case is price-stability,
and to perform as a key anchor of stability,” said Gonzalez-Paramo,
according to a text provided by the ECB.

“This implies very careful analyses of any sudden unexpected shocks
before considering a change to its monetary policy stance,” he said. The
comments may reflect a desire of the ECB to dampen any expectations that
it might lower rates in the near future.

Despite the continuation of the Eurozone’s sovereign debt crisis,
the ECB last week decided to keep rates on hold at 1.5% percent, likely
motivated in part by the need to keep expectations anchored despite an
unexpectedly sharp increase in consumer inflation to 3% in September.

Eurozone central banks have opted for a targeted response to the
debt crisis focused on temporary liquidity support to the banking sector
to ensure the transmission of monetary policy, Gonzalez-Paramo said.

“Maintaining measures which have outlived their usefulness for too
long could trigger other types of imbalances which could contribute to a
new crisis in the future,” he warned.

“For example, if support for the banking sector is provided for too
long, banks’ incentives to resume market-based funding activities may
suffer and markets may become increasingly dependent on central bank
funding,” he said.

Gonzalez-Paramo also said that in his view it was important that
the ECB’s non-conventional policies be ended in a “gradual manner” to
“ensure that the withdrawal of support measures does not lead to renewed
market tensions.”

“Once market conditions have improved to the point at which the
monetary policy transmission mechanism can function without additional
central bank support, monetary policy implementation will be able to
revert to a more conventional format,” he said.

The ECB’s “decision to scale back the non-standard measures can be
taken separately from any decisions on the level of interest rates that
are set by the ECB,” he emphasized.

–Brussels Bureau, +324-952-28374; pkoh@marketnews.com

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