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ECB Official Espouses Low Rates, Says Funding Limits Reached

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Juergen Stark, a member of the European Central Bank's (ECB) executive board, said in an interview with the Portuguese newspaper Publico that despite the recent increase in interest rates that the ECB put into effect, rates were still very low and encouraging to growth. He also said that banks in troubled nations like Portugal cannot depend on more funding from the ECB.

Reuters reported that in the interview, Stark said that "a gradual increase in interest rates" had been under discussion by ECB policymakers. Of the present rate, he was quoted as saying, "I agree that even after it was raised to 1.25%, the interest rate is still very low in historical terms. It is still very accommodative and contributes to economic growth and job creation."

When asked how banks in Portugal could lessen their reliance on the ECB without making the country’s citizens even more unhappy, Stark replied that the ECB had hit its support limit. "We cannot do more in this respect," he said. "There is an overall improvement in the interbank market in the euro area, but admittedly not in all regions."

He went on to say, "What is needed is structural adjustment for the banks not to depend for too long only on the refinancing operations of the ECB…. But this is not our task. It is not our task to recapitalize banks; that is a task for governments."

His comments do not bode well for Portugal, or for Greece or Ireland either, who had been hoping that the ECB might devise a new liquidity facility to provide medium-term funding for troubled banks working to right themselves.

Stark also raised doubts over the longevity of the ECB’s government bond purchase program, introduced last May to ward off the debt crisis in the euro zone. Speculation has been that the ECB may shut down the program, and Stark seemed to confirm this, saying, "We bought government bonds on the secondary market in order to ensure the smooth functioning of the transmission mechanism of monetary policy. We see now that the transmission mechanism in the euro area as a whole works well."


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