FRANKFURT (MNI) – The European Central Bank’s government bond
buying program has effectively been halted but the facility should
remain in place as a precautionary measure, ECB Governing Council member
Ewald Nowotny said in an interview with Reuters Insider TV on Tuesday.

“As data show, the bond buying programme has been reduced to more
or less zero, but it makes sense to be in place as a security measure,”
Nowotny said.

While “for the time being, markets do function on their own,”
Nowotny said that “it makes sense to keep this institutional structure
because it may make sense to observe developments for some time to
come.”

Nowotny also said that European banking stress tests are a serious
exercise and should have a positive impact on markets.

“These stress tests that we are doing are very serious. They are
based on very strict assumptions, so I think the results of these tests
have to be taken quite seriously,” Nowotny said.

“We think that markets will react positively to these stress tests,
to the results of the stress tests,” he added.

He warned against making a direct link between ECB liquidity policy
and results of the stress tests. “You have to see the two issues in a
separate way,” he said.

“What we have now is an organized stress test and then we have the
government reaction to these results…Then at the ECB we will have to
look at how markets are developing and then we will have to act
accordingly,” Nowotny said.

The head of the Austrian National Bank said that for the time
being, the ECB has no intention of changing its liquidity framework.

“We will have to discuss this, of course, with the Governing
Council but for the time being I see no intention to change that,”
Nowotny said in response to a question on the future of 3-month
fixed-rate, full allotment refinancing operations.

Nowotny reiterated that the ECB is not concerned about the recent
rise in money market rates following a significant decline of surplus
liquidity in the banking system.

“We see this as a normalization of the monetary situation. We have
reduced the liquidity in the banking sector in a substantial way. It has
been obvious that this reduction of liquidity has not led to any
imbalances,” he said.

He said that he is confident higher market rates will not have a
negative impact on the Eurozone economy.

“I think what we see is that especially exports are in very good
shape so, that we see strong impulses for the European economy. We
assume that these impulses will also be strong in the second half of
this year,” he said.

“I do not see a double-dip scenario. it is not our forecast for the
economy as such,” Nowotny said.

–Frankfurt newsroom +49 69 72 01 42; e-mail: frankfurt@marketnews.com

[TOPICS: M$$EC$,M$X$$$,M$$CR$,MGX$$$]