Higher Market Rates Won’t Hurt Economy

ECB Board Members Say Higher Market Rates Won’t Hurt Economy

Share Business ExchangeTwitterFacebook| Email | Print | A A A

By Gabi Thesing and Simone Meier

July 9 (Bloomberg) -- Two European Central Bank Executive Board members downplayed concerns about the recent increase in market interest rates, saying it won’t hurt the economy.

The gain in the overnight Eonia rate is “very small” and “we shouldn’t exaggerate this development,” Juergen Stark told reporters in Frankfurt today. His colleague Lorenzo Bini Smaghi told Bloomberg Television that “it’s not going to affect ultimately the interest rates banks charge customers.”

Market borrowing costs are rising after banks tapped the ECB for less funds than expected before paying back a record 442 billion-euro ($559 billion) ECB loan on July 1, reducing excess liquidity in the system. Some economists and investors are concerned that higher market rates may hurt Europe’s recovery amid the sovereign debt crisis and uncertainty about the health of the region’s banks.

The rate that banks charge each other to borrow for three months has increased to 0.82 percent, the highest in almost 11 months, from 0.63 percent at the end of March. The European Overnight Index Average rate, or Eonia, rose to 0.542 percent on June 30 from as low as 0.295 percent on June 3. It was fixed at 0.398 percent yesterday.

“We have seen only a slight increase in Eonia rates,” Stark said. “That’s an important signal for confidence that is given to the euro area and within the banking system.”

Bond Purchases

Stark also said that if bond markets continue to improve, the ECB should end its purchase program.

“We’ve always said that this is a temporary measure like other non-standard measures,” he said. “We monitor the situation and if the situation improves further, there’s no reason anymore to continue with this program.”

The International Monetary Fund this week said the ECB may have to step up its bond purchases to convince investors it won’t allow market tensions to escalate. It also cut its forecast for euro-region growth next year to 1.3 percent from 1.5 percent. The 16-nation economy will expand 1 percent this year, it said.

“The IMF is underestimating the strength of the recovery in Europe,” Stark said.

Bini Smaghi said he expects a “strong” second quarter and then more “moderate” economic growth. “One has to be reasonably optimistic,” he said, adding that “lending from banks is picking up.”