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ECB's Draghi calls money market rates 'unwarranted'

The European Central Bank (ECB) President Mario Draghi reacts during the monthly news conference in Frankfurt, February 9, 2012. REUTERS/Alex Domanski

By Aija Krutaine

RIGA (Reuters) - European Central Bank President Mario Draghi said Thursday that the recent rise in bank-to-bank borrowing costs was unwarranted.

His comments come a week after the central bank, having left its monetary policy stance unchanged, said that it was ready to cut interest rates or pump more money into the euro zone economy if needed to bring money market rates down.

Signs of an economic recovery have combined with the expectation the U.S. Federal Reserve may reduce its stimulus soon and with falling excess liquidity - the level of cash beyond what banks need to cover their day-to-day operations - to push up market rates.

The ECB has tried to steer them lower by introducing forward guidance that it will keep its own key interest rates low or even lower for an extended period of time. The impact has been limited.

On Thursday, Draghi chose the official euro entry conference in Latvia to say that short-term money market interest rates were "unwarranted".

"The short-term money market rates at some point in time have been unwarranted and they are and we will continue with the same forward guidance," Draghi said.

He said the bank could deal with this. "We are not running out of options at all," he said.

Money markets showed very little reaction to Draghi's comments on Thursday, having shrugged off the ECB's efforts last week to halt a rise in bank-to-bank borrowing costs and are discounting the chance of a rate cut in the coming months.

ECB Governing Council member Ardo Hansson told Reuters in an interview on Wednesday that offering more long-term loans to banks was an option on the table, but that for now the current policy stance seemed appropriate.

Draghi took a cautious view of the recent signs of stabilisation in the euro zone economy, saying the recovery was still "very, very green".

"I haven't manifested any enthusiasm for the better data, mostly by the way survey data, not hard data, that we have seen in the recent past. We will continue in the present (monetary policy) stance," Draghi said.

(Reporting by Aija Krutaine, additional reporting Marius Zaharia in London)