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ECB is ready for 'non standard' policy

Latest update : 2009-03-13

European Central Bank governor Christian Noyer says the ECB has already taken unorthodox emergency measures that can be termed "quantitative easing," to boost the economy and that it is ready to do more if necessary.

AFP - One of the governors of the European Central Bank, France's Christian Noyer, says the ECB has already taken unorthodox "quantitative easing" measures to boost the economy and is ready to do more if needed.

An ECB decision to pump huge amounts of cash into the eurozone banking system that was renewed last week had taken the ECB into "non-standard monetary policy," Noyer told the Financial Times in an interview on Friday.

"It is a way of doing quantitative easing, certainly," said Noyer, who is also head of the Bank of France.

Quantitative easing describes how a central bank, having already cut interest rates to effectively zero, will then create cash to pump directly into the financial system in the hope of boosting demand.

The Bank of England recently took a first step down this track, creating 75 billion pounds (81 billion euros, 103 billion dollars) to buy government bonds from commercial banks who then have more cash on hand to lend and invest.

ECB head Jean-Claude Trichet recently suggested that the ECB was ready to look at what further measures it might take to get the recession-hit economy going again after slashing interest rates to a record low 1.50 percent.

ECB policymakers believe the importance of their decision to lend unlimited amounts of cash to commercial banks at fixed rates has been underestimated.

Noyer, who as head of the Bank of France sits on the ECB board of governors, told the FT that looking ahead, the ECB "would not rule anything out."

If credit markets ceased to function, a "central bank may consider that at a certain point it is appropriate to intervene directly," which suggested the ECB might for example buy corporate bonds outright.

It is not allowed to buy government bonds directly.

The ECB governor also pointed to signs that the bank's policies had begun to work.

"Market and lending (interest) rates are continuing to move nicely downwards," Noyer said, adding: "We need some time for all that ot feed through into the economy."

Noyer noted that very short-term market interest rates were now very close to the 0.5 percent the ECB pays commercial banks that deposit money overnight.

"As a consequence, the rates effectively paid by (eurozone) borrowers are much closer to the situation in the US or UK than most people would imagine," he said.

The US Federal Reserve and Japan have essentially cut their main rates to zero while the BoE's is at an all-time low of 0.50 percent.
 

Date created : 2009-03-13

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