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Liikanen says ECB to keep interest rates low even amid recovery

By Kati Pohjanpalo

European Central Bank Governing Council member Erkki Liikanen reiterated that slack in the euro- area economy means policy makers will keep interest rates low even as growth improves.

“Owing to the high degree of unutilized capacity, ECB interest rates will remain at present or lower levels for an extended period of time, supporting the economy well into the recovery,” Liikanen, who also heads the Bank of Finland, said in an e-mailed report today. “In addition, the Governing Council stands ready to take further decisive action.”

The Frankfurt-based ECB has kept its benchmark interest rate at a record-low 0.25 percent since November. President Mario Draghi said for the first time after this month’s meeting that unutilized capacity, known as the output gap, warrants an ultra-loose monetary policy.

The euro-area economy expanded for a third quarter in the three months through December. Even so, inflation in the 18- member currency bloc was 0.7 percent in February, less than half the central bank’s goal of just under 2 percent.

“With inflationary pressures only moderate, euro-area monetary policy has been and can still be used to support growth and reduce the uncertainty surrounding the future direction of interest rates,” Liikanen said.

Global growth will accelerate to 3.5 percent this year from 3 percent in 2013, the Bank of Finland said. Its growth forecast for the euro area, Sweden, Denmark and the U.K. is 1.4 percent for 2014 and 1.6 percent in 2015. It doesn’t give a separate forecast for the single-currency bloc.

“Confidence in the financial markets and the funding conditions for banks have both improved,” Liikanen said. The ECB is conducting a bank balance-sheet review before it takes over supervision of the region’s biggest lenders in November.

“The ongoing comprehensive assessment will further help build confidence in the markets,” he said. “It is, however, premature to say the problems have been solved.”

[Bloomberg]

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