VIENNA (MNI) – The European Central Bank has “no intention to
change Eurozone [interest] rates in the near future,” ECB Governing
Council member Ewald Nowotny said Wednesday evening.
Nowotny, who heads the Austrian National Bank, also noted that “at
the ECB we do not see an imminent danger of inflation.” That, he said,
was the “unanimous view” that emerged from the ECB Governing Council’s
monthly meeting last Thursday.
“Inflation expectations are well stabilized. If you look at the
interest rates for 10-year government bonds there is a risk premium but
no inflation premium,” Nowotny added. “An outlook [for the Eurozone]
that is common but not very positive is a Japanese style development,
with low interest rates and low growth — which seems to be the much
more plausible development.”
Nowotny noted the “high divergence” among different Eurozone
economies, with Germany and Austria relatively buoyant and countries in
the periphery likely to have their growth forecasts downgraded. “We will
have a strengthening of the global economy, but for this year the euro
area in aggregate will show negative growth, which is due to a very weak
economy in Southern European countries,” he observed.
Nowotny asserted that the Eurozone has “basically” overcome the
banking crisis, and the big problem now is the crisis in government
finances. “The main challenge we must meet today is to avoid these
problems in public finances creating a negative feedback loop to the
banking sector again,” he said, noting that banks are “the largest
holders of sovereign debt.” That, he added, explains why the ECB was
prepared to intervene in a “massive way” with its E1 trillion in cheap
3-year financing to banks.
Still, Nowotny acknowledged that cash infusion from the 3-year
LTROs has not entirely solved the problem. “A lot of it went into the
ECB deposit facility – a lot of banks brought it back to the ECB with a
negative spread,” he noted. “We still have a situation in which the
nervousness of the market is pretty high, where money markets are still
not functioning, so the ECB to a certain extent has had to take on the
role of money markets. This is not what we wanted, and we will have to
reduce this, but it takes time.”
With regard to the ECB’s bond purchases, Nowotny said it was a
“limited program,” and he observed that “we have not been buying over
the last months.”
He noted that before the crisis there was “hardly any
differentiation” in bond spreads between Eurozone countries, and now the
spreads have risen to levels that in some cases have “become very
dangerous.” Whereas markets underestimated risks before the crisis, “now
they tend to overestimate risks,” he said. The extremely wide spreads
that prevail today create “a very difficult situation for a monetary
union.”
[TOPICS: M$$EC$,M$X$$$,M$Y$$$,M$G$$$,M$$CR$,MGX$$$,MT$$$$]