☰

M. Continuo

ECB's Orphanides: Accommodation still needed


    FRANKFURT (Reuters) - The European Central Bank has to keep its monetary policy accommodative while it continues unwinding of some of its crisis liquidity measures, Governing Council member Athanasios Orphanides was quoted on Monday as saying. Orphanides also told news agency Bloomberg he was concerned that inflation undershooting the ECB's price stability definition could start to impact inflation expectations, and said there are advantages to keeping full allotment policy in place in at least some of its tenders.

    "The phasing out of some unconventional measures should not be misinterpreted as a desire to remove policy accommodation from the economy," Orphanides, who also heads the Central Bank of Cyprus, said in an interview on February 12.

    "Policy accommodation continues to be needed in light of the very subdued inflation outlook and the unevenness and weakness of the economy."

    Inflation in the euro zone was 1.0 percent in January, well under the ECB's target of below, but close to 2 percent. ECB staff projections see it in the range of 0.9 and 1.7 percent this year and 0.8 to 2.0 percent in 2011.

    A quarterly survey of professional forecasters, published last week, saw next year's inflation averaging 1.5 percent, down from 1.6 percent three months earlier.

    Orphanides also said the inflation outlook was determining the ECB's future rate path, hinting there is no rush to raise rates as long as expectations remain well below the target.

    "Evolution of the economy and the associated risks to price stability are the key," he said.

    He also said the ECB had to be symmetrical in its quest for price stability -- meaning it should react as forcefully to inflation undershooting as overshooting its target.

    Monetary data confirmed the view that euro-zone economic recovery is still weak, Orphanides also said.

    "We also note the weakness in the money figures as well as the weakness in credit growth. Those are in my view consistent with the recovery not being very strong at the moment."

    Orphanides also said the ECB should not lightly drop its full allotment policy in all liquidity tenders.

    "It's very hard to assess precisely what the demand for liquidity in the banking sector is," he said. "It is entirely sensible to have a procedure that can flexibly meet variations in the demand for liquidity, and that is what our fixed-rate, full-allotment policy is doing."

    Orphanides comments chime with fellow Governing Council member Axel Weber, who told Reuters last week commercial banks would probably need unlimited funds at the ECB's regular weekly lending operations for some time to come, but other steps would be gradually phased out.

    The ECB is due to decide in March how it will handle the unwinding of emergency lending measures in the second quarter, although economists expect no change to its main policy rate, currently at 1.0 percent.

    (Reporting by Krista Hughes and Sakari Suoninen; editing by Patrick Graham)