ECB's Mersch: Excess Liquidity Policy Must Not Become Permanent

(RTTNews) - European Central Bank Executive Board member Yves Mersch said on Tuesday that the bank must ensure smooth flow of liquidity to the banking sector, while making sure that the excess liquidity policy will not become a permanent one.

"Excess liquidity policy, however useful and necessary it has been - and still is, should not become a permanent feature," Mersch said in a speech in Frankfurt.

"It should be limited in time to avoid dressing-up non-performing loans or ever-greening bad assets that would undermine incentives to restructure or to address structural weaknesses in banks' balance sheets."

On November 7, the ECB cut the key interest rate by a quarter-point to a record low 0.25 percent, given the combination of low inflation, record unemployment and a stronger currency.

The policymaker urged banks to pass on the favorable financing conditions they enjoy to households and firms to ultimately revive the flow of credit in the euro area. "The ball is in the court of the private sector and the euro area governments," Mersch said.

He also pointed out that the EU Treaty had assigned a precise mandate for the ECB, which is to maintain price stability. "Likewise, the scope of action is limited and some tasks are explicitly prohibited, e.g. the outright purchases of government bonds on the primary market, i.e. the monetization of public debt," the policymaker said.

The effective and successful conduct of monetary policy must not be used as a pretext for complacency in other policy areas, he added.