ECB has room to react to Fed-triggered turbulence – Praet

ECB has room to react to Fed-triggered turbulence - Praet

PARIS (Reuters) – The European Central Bank has room to manoeuvre to assist offset any turbulence caused by the U.S. Federal Reserve reining in its monetary stimulus, ECB Executive Board member Peter Praet said in a newspaper interview published on Sunday.

Global bond markets have sold off since the U.S. central bank first indicated in May that it was preparing to slow the pace of its bond purchases.

“As long as inflation expectations remain well anchored, the ECB has room to move,” Praet, who holds the influential economics portfolio at the ECB, told French business daily Les Echos.

The bond market rout has driven yields higher across the board, including for low-risk German debt, which Praet said was a sign of “normalisation” after the record low rates of recent years.

He said that recent tensions on short-term money markets were partly due to falling liquidity in the banking system as some banks repaid 3-year loans that the ECB granted during the darkest episodes of the euro zone’s debt crisis.

A steep increase in euro zone money market rates has raised questions approximately the effectiveness of the ECB’s promise to keep interest rates low for a long time.

Praet said that if the tensions persisted the ECB could take action by altering the so-called corridor between its different policy rates.

He said that it remained to be seen whether banks were paying back the 3-year loans because they were trying to shrink down their balance sheets & reduce lending to the economy, possibly causing a de facto tightening of monetary policy.

“We are following this question closely & stand ready to take action if necessary,” Praet added.

(Reporting by Leigh Thomas; Editing by Robin Pomeroy)

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