OSAKA, Japan (MNI) – The European Central Bank is well equipped to
withdraw large amounts of liquidity from the financial markets quickly
if inflation risks arise but it has no plans to do so in the near
future, ECB Executive Board member Benoit Coeure said Wednesday.

Coeure told a banking seminar here that the “very weak” European economy is
expected to “recover gradually” in 2013 but confronted by signs of
weaker growth in Asia and the U.S., “the Euro area can count only on its
own forces.”

Asked if he sees any inflationary or deflationary pressures emerging in the
region, Coeure said, “There is no danger as risks to price stability are
balanced … also because of monetary policy decisions taken by the ECB.”

Europe is not exposed to deflationary risks in the short term, he added.

The ECB’s mandate of ensuring price stability has not changed but its policy
tools have evolved to counter unprecedented financial crises, the ECB
policymaker said.

“If there is any sign that risks to price stability materialize, then we are
most likely to withdraw liquidity from our system, and that’s very easy,” he
said.

Asked what the central bank would do as a first step when it detects a sign of
price instability, and what it would do if that did not work, he replied, “If we
have to withdraw liquidity, we will come back to our usual way of tendering
liquidity, which is variable rate allotments, instead of fixed full lot
allotments.”

But he quickly added: “We have no plan to do it in the near future but at any
time we can do it.”

“If there is a need to withdraw large quantities of liquidity in a short time
span, we have an instrument that we’ve never used, that we said we could use,
which will consist of issuing debt certificates. That’s something that lots of
central banks do,” he said.

Coeure said the ECB does not formulate monetary policy “dominated by banking
system supervision.”

European banking system adjustments in the wake of the sovereign debt crisis are
only “half way” complete and money is not sufficiently flowing to businesses and
households from lenders in countries like Spain, he said.

He declined comment on developments in foreign exchange markets or how he
evaluates Japan’s forex intervention policy, but simply said, “the euro is
stable.”

Asked about the notion that if the single currency system fails, Europe will
fail, Coeure replied, “I agree.”

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