ECB says ready to use any option to temper market rates


* 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 jumps to highest since February against the dollar

* 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.

But he stopped short of any immediate action.

The ECB has grown concerned about market rates, which movedhigher over the summer at the prospect of the U.S. FederalReserve unwinding its stimulus - a rise that subsided after theFed delayed a reduction in its bond purchases.

Draghi said the ECB stood ready to use any of the "vastarray of instruments" it has to act on market rates if needed,echoing his pledge in July last year to do "whatever it takes"to save the euro.

"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," Draghi said with reference to ultra-long loans,which the ECB deployed in late 2011 and 2012 to pump over 1.0trillion euros ($1.35 trillion) into the system.

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 a rate cut, but they didnot take Draghi's comments as a cue for immediate ECB action.

"None of this means ... that the ECB is about to launch amajor easing offensive," Greg Fuzesi at JP Morgan said afterThursday's ECB news conference in Paris.

The euro rallied to its highest since February against thedollar, reaching a peak of $1.3606. It last traded at$1.3588, up 0.5 percent on the day, as Draghi set out noimmediate plans to loosen policy further.

Noting that Draghi said no one at the ECB wants to see a"liquidity accident", Fuzesi expected a two-year LTRO in thefirst quarter of next year.

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.

The ECB is concerned that higher short-term market ratesthat banks use when lending to each other could hurt the eurozone's recovery and push inflation further below target.


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 Fed decided not to beginwinding back its money-printing programme, Draghi said it wasmonitoring its potential impact on the currency bloc'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," he said.

Seeking to guide down market rates, the ECB said in July itwould keep 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.

Draghi described the euro zone recovery as "weak, fragileand uneven", adding: "Credit flows are still weak; I would sayvery weak."

Inflation slowed to 1.1 percent in September - its lowestsince February 2010 and a level that allows the ECB to maintainits loose monetary policy.

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.

The euro zone was now more resilient, he said, 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.

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