ECB says measures will push inflation up, but money-printing still possible

By Eva Taylor and Paul Carrel

FRANKFURT (Reuters) - A raft of policy measures introduced last month will help lift inflation and support bank lending but the European Central Bank stands ready to create money in future if required, President Mario Draghi said on Thursday.

The ECB left interest rates steady a month after cutting them to record lows and pushing the deposit rate into negative territory for the first time - effectively charging banks for holding their money overnight to prompt them to lend to businesses.

The measures unveiled in June also included extending the duration of unlimited cheap liquidity for banks until the end of 2016, and offering them a four-year loan plan.

Detailing the loan plan, Draghi said banks must use the new funds to lend or else they will be made to pay back the money. He said last month's measures had further loosened the euro zone's monetary policy stance.

"The monetary operations to take place over the coming months will add to this accommodation and will support bank lending," he told a news conference after the ECB left its key rate at just 0.15 percent.

"As our measures work their way through to the economy, they will contribute to a return of inflation rates to levels closer to 2 percent."

The euro zone inflation rate held at 0.5 percent last month, well below the ECB's target of close to but below two percent and in what Draghi has called the "danger zone".

If people and firms began deferring spending plans on the basis that they expected prices to fall, an economic downward spiral of the sort suffered by Japan could take hold. The ECB says its sees no sign of that.

Draghi said the ECB's Governing Council was united in its willingness to launch into quantitative easing - essentially creating money to buy government or private debt from banks to keep borrowing costs low and boost spending - if inflation headed lower still.

Risks to the recovery remained primarily negative, he added.

"The Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation," Draghi said.

Few analysts expect that to be remotely possible until late this year. The central bank has said last month's moves could take up to a year to take full effect.

"Draghi maintained a dovish tone, but the threshold for further near-term easing is high," said Jan von Gerichchief strategist for developed markets at Nordea. The ECB president did little to sharpen the bank's forward guidance on interest rates, saying there was no direct link between the guidance and comments he made last month on unlimited cheap liquidity for banks until the end of 2016.

Draghi said the ECB was watching the euro's exchange rate with great attention. Ahead of Thursday's meeting, Prime Minister Manuel Valls had renewed French calls for the ECB to help bring down an "overvalued" euro.

"The exchange rate is not a policy target, but it has become important," Draghi said. "It is definitely very important for our outlook on price stability."

TLTROs

Banks will be charged a 10 basis point premium over the ECB's main funding operations for the TLTROs, or targeted long-term refinancing operations.

By offering banks the four-year loans at low rates, the ECB hopes to entice banks to lend more freely, particularly to small- and medium-sized companies in the euro zone periphery.

Banks across the euro zone were still digesting the technical provisions of the ECB's announcement, and several said it was too early for them to be specific on whether they would use the scheme and if it would help them boost lending.

A spokeswoman for Austria's Raiffeisen Bank International, emerging Europe's second-biggest lender, said the bank had calculated potential use of around 500 million euros.

"This doesn't mean we will take 500 million," he added. "It is too early to say but at the moment it does not look unattractive."

The head of the Italian Banking Association said on Wednesday the new ECB scheme would be particularly successful in Italy. But the deputy chief executive of Greece's National Bank told Reuters his bank would not be able to use the operation to draw new funding, and carry out new lending, since it does not have extra collateral available to pledge to the ECB.

Big questions remain, one being why banks would be likely to lend more before stress tests later this year at which they must demonstrate they have cleaned up their balance sheets.

"Banks should take full advantage of this exercise to improve their capital and solvency position, thereby supporting the scope for credit expansion during the next stages of the recovery," Draghi said.

The ECB chief said the central bank would move to a schedule of six-weekly rather than monthly meetings from next year, mirroring the frequency of the U.S. Federal Reserve's policy gatherings.

It will also start publishing regular minutes of its meetings, as the Fed and Bank of England do.

(Additional reporting by Michael Shields in Vienna, and Laura Noonan in London; Writing by Mike Peacock, Editing by Jeremy Gaunt)