— Adds Comments to Story First Transmitted Thursday At 11:18 EDT

FRANKFURT (MNI) – The European Central Bank’s main interest rate is
“appropriate” for the moment, but there is nothing preventing the
central bank from cutting it below 0.75% if needed, according to ECB
Governing Council member Klaas Knot.

“Currently, we believe 0.75% is appropriate,” Knot said in an
interview released Thursday by Financial Times Deutschland. “Should the
situation worsen, there is no article of faith that would prevent us
from going below 0.75%.”

Knot, who also heads the Dutch central bank, said the decision to
cut rates further would be based on the outlook for inflation, which had
been the key determinant for cutting rates at the last meeting.

“The only reason we went to 0.75% is because of medium-term
expectations for price stability. Inflation expectations fell before our
rate cut. The same was true for producer prices,” he said.

“Before, everyone believed 1% was the rate floor. Our decision
showed that was not the case,” Knot added. “Now, I can only say that
0.75% is no article of faith for us” either.

“The only article of faith we have is that the interest rate level
must bring us as close as possible to price stability over the medium
term, which means an inflation rate of below, but close to 2%” for the
Eurozone, he said.

Knot noted the ECB’s two longer-term refinancing operations helped
to prevent a credit crunch and that, if needed, a third LTRO was
possible. “But right now, I hardly see an additional benefit in this,”
he said.

The Dutch central banker stressed that he saw no inflation risks
stemming from the liquidity injections, adding that inflationary
pressures could only arise through monetary and credit growth: “So far,
there is no sign of this.”

Knot applauded the agreements made during the two-day EU summit
late last month, saying that governments had shown their commitment to
do whatever was necessary to overcome the crisis.

However, he was skeptical about the effectiveness of government
bond purchases by the European Stability Mechanism on the open market,
noting that when the ECB made similar purchases, the fall in yields was
only temporary.

“Still, there are circumstances in which [the purchases] are
useful,” Knot conceded. “However, I would suggest that one should
already know how to exit from the start. Moreover, the purchases would
be subject to strict conditions.”

Knot underscored his opposition to giving the ESM a banking
license, saying that having the bailout fund financed by the ECB would
amount to a violation of the prohibition against state financing.

“The ESM is part of the state sector and cannot be financed by the
ECB,” the central banker said.

On banking supervision, Knot said that a plausible model could be
that of the Eurozone; one central entity and 17 national institutions.
“I think we need the supervision of a single legal entity,” Knot said.
“A European System of Banking Supervisors, where there is a central and
national supervisors.”

“The responsibility for banking supervision would need to be passed
on to this system,” Knot said, adding that the centre would intervene
when needed.

Knot said the ECB would have to examine other countries’
experiences before considering whether it can bring the discount rate
below 0%.

“We have no experience with negative interest rates,” Knot said,
adding the ECB is “watching closely” the experience of Denmark, where
the discount rate is currently at -0.2%.

“We should learn from the experiences of other countries with
negative rates before we decide if this is an option for us,” Knot said.

— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —

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