VIENNA (MNI) – The European Central Bank’s interest rate cut last
week “will have positive effects” and “stimulate loans,” despite the
financial markets’ lackluster response to it, ECB Governing Council
member Ewald Nowotny said Monday.

He said the markets’ sense of being underwhelmed by the ECB
decision could be explained by investor nerves in the face of a
deteriorating economic situation.

“Markets are very emotional. Their reaction is determined by many
factors and at the moment we unfortunately see a tendency towards a
worsening of the European economic situation,” Nowotny said.

Nowotny, who is governor of the Austrian National Bank, declined to
comment on the possibility of any further cuts by the ECB after last
week’s 0.25 point reduction in the main refinancing rate to a record low
of 0.75%. He said the ECB “favours a step-by-step policy with a sense of
proportion, where effects of the measures are always checked.”

The ECB also cut its deposit rate to zero last Thursday, and
Nowotny suggested a negative deposit rate was not likely in the offing.
“A further lowering would not have much of an effect, since I think that
at this level of zero it is not really a question of economic
perspectives…but more a question of general risk aversion, which we
are seeing at the moment,” he said.

The Austrian central bank chief added that the “ECB never uses all
its firepower at once,” and therefore, compared to other central banks,
it “still has instruments available.” But he did not name any particular
measures or instruments.

On the question of a single European banking supervisor, Nowotny
said the framework would be designed as “as soon as possible” and could
be ready “by the end of the year.” He noted there was “time pressure,”
because of the European Council’s decision to link the creation of
unified EU bank supervision with the ESM’s ability to inject capital
directly into troubled banks rather than lending the money to the
sovereign government concerned.

But Nowotny added a note of realism, observing that “the practical
implementation of EU banking supervision will take longer.”

He also stressed that the new tasks the ECB will take on within
that framework “must not impinge on its monetary policy remit.” EU
leaders agreed late last month that the new pan-European bank supervisor
would be housed within the ECB or report to it.

Striking a cautious tone, Nowotny noted there was an
“implementation problem” in Europe. “A number of decisions have been
made on a European level but there are many individual states which are
insisting on having their own, individual decision mechanisms,” he said.

As one case in point, Nowotny mentioned the ESM, “which should have
started by now” but which “cannot be implemented yet because a major
country, namely Germany, has not [ratified] it yet.”

He stressed that implementation of mechanisms like the ESM or
European banking supervision should happen “as soon as possible” – among
other things because “Greece only has a limited amount of time.”

Nowotny said he viewed Greece “with a bit of concern because there
is a major need for reforms but they are currently at a standstill.”

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