ECB says all options open to temper market rates

Reuters

* ECB holds rates as expected

* Fed delay of stimulus exit takes pressure off ECB to act

* Draghi says all options open to keep lid on market rates

* No euro FX target but watching impact on growth, inflation

* Euro zone more resilient to troubles such as in Italy

By Eva Taylor and Ingrid Melander

PARIS, Oct 2 (Reuters) - The European Central Bank iswatching moves in market interest rates closely and is ready touse any policy option to temper them if needed, its presidentsaid on Wednesday.

The central bank was "particularly attentive" to any movesin market rates which could threaten economic recovery or pushinflation too low, Mario Draghi told a news conference after theECB left official euro zone rates at a record low 0.5 percent.

A majority of economists polled by Reuters expect the ECB tokeep its key rate at 0.5 percent until at least April 2015. Theyalso predict it will serve up another course of long-term cheapliquidity to banks (LTRO), possibly by the end of this year.

Analysts have also not ruled out an interest rate cut.

"With regard to money market conditions, we will remainparticularly attentive to developments which may haveimplications for the stance of monetary policy," Draghi said.

"We are ready to use any instrument including another LTROif needed."

While the ECB did not have a target for the euro, which isclose to a two-year high against a basket of other currenciesand could rise further since the U.S. Federal Reserve decidednot to begin winding back its money-printing programme, Draghisaid it was monitoring its potential impact on the currencybloc's economy.

"The exchange rate is not a policy target for the ECB ...However, the exchange rate is important for growth and for pricestability, and we are certainly attentive to thesedevelopments."

The ECB has grown concerned about market rates, which movedhigher over the summer at the prospect of the Federal Reserveunwinding its stimulus.

Seeking to guide them down, the ECB said in July it wouldkeep its rates at current or lower levels for an "extendedperiod". That forward guidance, which Draghi reaffirmed onWednesday, struggled to gain traction until the Fed last monthdelayed any action.

Excess liquidity - the amount of money beyond what thebanking system needs to function - has fallen to 221 billioneuros from over 800 billion early last year, approaching a levelexpected to push market rates closer to the ECB's main rate.

The excess has fallen as banks repay the LTROs they tookfrom the ECB in late 2011 and early 2012 and the ECB isconcerned that higher short-term market rates that banks usewhen lending to each other could hurt the euro zone's recoveryand push inflation further below target.

SLOW RECOVERY

The euro zone economy is broadly sticking to the ECB'sscenario for a slow recovery. Inflation slowed to 1.1 percent inSeptember - its lowest since February 2010 and a level thatallows the ECB to maintain its loose monetary policy.

However, manufacturing growth in Italy and Spain eased offin September, highlighting the fragile state of the recovery inthe euro zone periphery. Greece's contraction deepened.

"Confidence indicators up to September confirm the expectedgradual improvement in economic activity from low levels,"Draghi said. "Underlying price pressures in the euro area areexpected to remain subdued over the medium term."

Italy's political troubles - keeping a fragile coalitiongovernment from having to call new elections - are also in thebackground, but Draghi played down any threat of contagion tothe currency bloc.

Draghi said the euro zone was now more resilient, thanks inpart to the ECB's pledge to buy the bonds of euro zone memberstates if needed to protect the currency bloc, and structuralreforms enacted by governments.

"It doesn't really hurt the ... euro zone as it used to do afew years ago. The euro zone and euro (are) more resilient," hesaid.

A new LTRO could aim to raise excess liquidity, and easebanks' funding situation before the ECB's asset quality review(AQR) next year, a precursor to its new supervisory role.

But the fall in market rates has relieved some of thepressure to act, and the ECB risks disappointing markets ifbanks, which have been repaying early some of the twin LTROSfrom 2011 and 2012, show little interest in additional loans.

The forward rate which shows where one-year Eonia rates areseen in a year's time, has fallen to levels last seen in Julywhen the ECB launched its forward guidance.

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