The European Central Bank's gradual withdrawal from its crisis lending measures will avoid market distortions and bank addiction to liquidity support, president Jean-Claude Trichet said today.
Briefing members of the European Parliament, he said there were no signs of a credit crunch in the euro zone although uncertainty about the economic outlook would keep firms' demand for new loans low. The ECB kept rates on hold last week but outlined plans to start withdrawing the cheap and generous liquidity it has pumped into the system for more than a year.
"This will avoid distortions associated with maintaining non-standard measures for too long," Mr Trichet told the Economic and Monetary Affairs Committee.
"It is important to avoid a situation in which banks are heavily dependent on exceptional central bank financing. In the context of a stabilisation in the money markets, incentives have to be strengthened for banks to restructure their balance sheets through recapitalisation.
"In addition, a timely and gradual phasing-out should help activity in the money market and strengthen peer monitoring among banks."
Mr Trichet said it was important the withdrawal of extra liquidity steps was gradual and happened at the right time, with no predetermined plan to err on the side of too early versus too late.
Interest rates remained appropriate, and the ECB would continue to fully accommodate banks' liquidity needs at fixed interest rates in all our main refinancing operations for as long as is needed, and at least until mid-April next year.
Reuters