ECB's Asmussen plays down rate cut speculation

FRANKFURT: A top European Central Bank official played down Thursday growing expectations of a looming cut in eurozone interest rates, saying that such a move should not be seen as a cure-all for the region's debt crisis.

"Monetary policy is not an all-purpose weapon for any kind of economic illness," ECB executive board member Joerg Asmussen told a conference in London in comments made available by the central bank.

There is growing speculation the ECB could lower its key interest rate -- already at all-time low of 0.75 percent -- in the coming months as the nascent recovery in the 17 economies that make up the euro already appears to be stalling.

Arguments for such a move received a boost Wednesday when data showed that business confidence in Germany, which has managed to escape relatively unscathed from the recession plaguing most of its neighbours, has taken a knock.

But Asmussen argued that the countries that would benefit most from even lower rates would not necessarily feel the effect of additional monetary easing.

"Due to impaired monetary policy transmission, the pass-through of rate cuts to the periphery would be limited, and this is where they are most needed," Asmussen argued.

"At the same time, rate cuts would further relax already unprecedentedly easy financing conditions in the core. This is not per se a problem -- but interest rates that are too low for too long can eventually lead to distortions," the ECB official argued.

Excessively low interest rates could lead to a misallocation of resources,excessive capital inflows into a number of emerging economies with exchange rate effects and credit risks, and it would reduce incentives for governments, banks, and corporates to adjust, Asmussen said.

"These costs of very low interest rates are real, and they rise over time. Of course, these costs have to be weighed against the need for exceptional monetary policy measures in a crisis," Asmussen continued.

He insisted there were limits to what monetary policy could achieve.

"The ECB can and has addressed bank funding problems," via pumping unprecedented amounts of liquidity into the system via its so-called LTROs, or long term refinancing operations, Asmussen said.

But the money does not appear to be finding its way through the system into credit to companies and business.

"There are other barriers holding back bank lending, like heightened risk aversion, a lack of loan demand and insufficient capital. And above all, bank lending will only fully come back when the bank balance sheet repair is completed in all member states," Asmussen said.

"The ECB cannot remove these constraints. This is where our responsibility ends and that of governments or other EU institutions begins," Asmussen said.