FRANKFURT (MNI) – Generous liquidity provision will do more to
ensure favorable financing conditions for Eurozone companies and
households than would lower interest rates, European Central Bank
Governing Council member Andres Lipstok said in an article in Estonian
periodical Postimees released late Tuesday.

“As the euro area’s banking problems have grown worse, changing the
central banks’ interest rates might not have a significant influence on
the financing conditions of companies and individuals,” Lipstok said.

Instead, the ECB decided to expand non-standard liquidity measures
“to help the monetary policy decisions of the Eurosystem … reach
borrowers more clearly,” he said.

The Governing Council decided to keep rates on hold at its last
meeting primarily because in their assessment, risks to the medium-term
inflation outlook remain balanced, said Lipstok, who heads the Bank of
Estonia.

“The potential deceleration of inflation is mainly related to
shrinking economic activity,” he said, noting that the tensions in the
euro area’s banking sector are detrimental to economic growth.

On the other hand, Lipstok said that “in the forthcoming years the
inflation of many euro area countries may be boosted by budget balance
improvements, which will partially be achieved through indirect taxes
and the administrative regulation of prices rises.”

Lipstok indicated that the central bank will not use interest rates
as a means to counter the crisis as “the options of the single monetary
policy in solving the debt crisis are relatively limited.”

In any case, overly aggressive central bank action may be harmful
in the long run, he warned.

“The purchases of government bonds and the massive provision of
liquidity to euro area banks in order to keep monetary policy functional
only help to alleviate the symptoms of the crisis, but do not tackle the
core of the difficulties,” he argued.

“Instead, there is a danger that the active contribution of central
banks might reduce the stimulus of governments to solve the situation,”
Lipstock said.

The head of the Estonian central bank also cautioned against
expectations of solving the crisis by throwing ever greater sums at it.

“Unfortunately, the misconception that one simply needs a lot of
money to break out of the vicious circle of distrust is quite
widespread. It is believed that money would help to patch up the
mistakes made in fiscal policy,” Lipstok said.

“However, in that case we would only amplify one of the key reasons
for the current problems — lack of accountability — and would thus
soon face an even greater crisis,” he added.

“Thus, with any implemented measure it is important to increase the
countries’ interest in pursuing sustainable fiscal policies,” he
stressed.

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

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