European Central Bank Governing Council member Erkki Liikanen said the ECB will unwind crisis measures in a “timely” manner and called on governments to use a lull in the turmoil to fix their economies.
“Central bank measures can be used to calm the financial markets, but a permanent solution to the debt crisis will require both successful fiscal and structural policies and a controlled and timely exit from the temporary central bank measures,” Liikanen, who also heads the Bank of Finland, said in an e-mailed statement today.
The Frankfurt-based ECB has shouldered the main burden of fighting the three-year-old crisis by keeping banks afloat, cutting interest rates to a record low and buying distressed governments’ bonds. The unprecedented measures have swelled its balance sheet to more than 3 trillion euros ($3.9 trillion), prompting Bundesbank President Jens Weidmann to write a letter to ECB President Mario Draghi warning that the central bank may be taking on too much risk.
The ECB’s two offerings of three-year loans, which totaled a record 1 trillion euros, have “had a decisive impact on market developments” and “pose no risk to price stability,” Liikanen said. While the ECB has raised its inflation forecasts, risks to price stability “remain balanced,” Liikanen said.
Signaling ECB officials’ unease that governments may yet again rely on the central bank to fight the turmoil, Liikanen said that “slippages in the implementation of political decisions in the current fragile economic and market situation would be dangerous and costly.”
A Bank of Finland report, which Liikanen presented today, said the idea that with the benchmark lending rate at 1 percent the ECB has no further room to cut interest rates is “misleading.”
“There is still scope for lowering the ECB’s benchmark interest rate and non-standard measures make monetary policy easing possible, if needed,” the report stated.
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