FRANKFURT (MNI) – The recent rise in Eurozone interbank lending
rates is not a concern to the European Central Bank, but rather is part
of a normalization process, ECB Governing Council member Ewald Nowotny
told Reuters in an interview published Wednesday.

Even if EONIA rates rose to match the central bank’s main
refinancing rate of 1%, this would be a “normal situation,” Nowotny, who
leads the Austrian National Bank, said.

He said he wasn’t concerned that higher interbank rates would
dampen the Eurozone’s economic recovery, since they do not affect
long-term interest rates, which are relevant for investment decisions,
he said.

However, the situation is not yet sufficiently normalized for the
ECB to stop conducting its 1-week and 3-month refinancing operations on
a full allotment basis, Nowotny said.

Such unlimited tenders are “not part of the normal ECB instruments,
but after such a big economic crisis it would be premature to think
about [stopping] that,” he said. “Until the end of this year or so, I
do not see any perspective of changes.”

He added: “It’s a matter of how stable the process of normalization
is. I think we do have a process of normalization but it still needs
more stability.”

Nowotny said the ECB “is very cautious with the exit strategy.
There is always a full allotment window available so that there is
always a certain safety element in that.

In regards to higher interbank borrowing rates, Nowotny said, “We
don’t see this as something disturbing. I see this as an element of
normalization because — in the amount as we have it now — it is a sign
of functioning money markets.”

Asked about the spread between EONIA and the refi rate potentially
narrowing to near zero, Nowotny said, “I can give no forecast but you
know that in the history of ECB monetary policy we had such situations
that EONIA had a very close relationship with our main refinancing
rate.”

“I see no liquidity issue for the European banking system,” he
added. “On the contrary, there has been a massive withdrawal of ECB
liquidity without any negative effects or market turmoil.”

Given the low level of core inflation expected for the foreseeable
future, interest rates will likely stay on hold through the rest of this
year and next year, Nowotny suggested.

“Core inflation is low and will stay low for the foreseeable
future, that means definitely for next year,” he noted.

“We do not see this as an aberration from any kind of inflation
goal. As long as we see these developments in the normal range, we do
not think that there is a need for specific reactions,” he concluded.

Nowotny asserted that the recent rebound of the euro will likely
not hurt recovery prospects in the single-currency area. “I don’t think
it will have major effects on our export performance,” he said. But he
warned that weaker economies might be affected by the upturn more than
countries exporting high-tech products, such as Germany and Austria.

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

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