European Central Bank President Mario Draghi has said he is ready to deploy another long-term refinancing operation to provide funds to Europe’s banking system if needed.
“We are ready to use any instrument, including another LTRO if needed, to maintain the short term money markets at the level that is warranted by our assessment of inflation in the medium term,” Draghi said.
The ECB chief was answering questions in the European Parliament in Brussels today.
Euro-area money-market rates rose to a level that Draghi described as “unwarranted” in July after the US Federal Reserve signaled that it would begin to ease stimulus and signs emerged of a recovery in the euro zone.
While those rates have since declined, excess liquidity in the financial system is approaching the €200 billion level the ECB has previously signaled as a lower limit.
In his opening remarks at the hearing, Draghi said while repayment of central bank credit is “certainly a sign of normalisation, the resulting reduction in excess liquidity can reinforce upward pressures on term money market rates.”
As the buffer of excess cash held by the financial system falls, the rates that banks charge each other for liquidity can rise as they shoulder more risk. The ECB has also tried to keep money-market rates in check by issuing forward guidance on its official interest rates, saying that they will remain where they are or lower for “an extended period.”
“Reliance on ECB funding support has been steadily declining,” Draghi said.
Europe’s banks will repay €7.91 billion of three-year loans this week, data released by the ECB on September 20 showed. That is the highest level of repayments since May.
The ECB introduced two sets of loans of longer maturity than before, beginning in December 2011, as a credit crunch in Europe threatened.
Draghi said the ECB will remain “particularly attentive” to the implications falling excess liquidity could have for monetary policy, echoing language from a September 5 press conference.
“We are down from €800 billion to €250 billion in terms of excess liquidity, and that is all in all good news,” he said then.
“I remember some time ago I mentioned a figure of €200 billion as the threshold, but in fact it is really context-dependent. It depends on the context; it depends on the degree of fragmentation that we have,'' he added.
“Over the past twelve months, confidence in the euro area has returned,” Draghi said today.
“As a consequence, fragmentation in euro-area funding markets has been receding. This improvement owes not only to the ECB’s non-standard measures, but also to progress by governments in improving the euro-area governance and in pursuing reform agendas,'' he said.
