Stimulus phase-out at ideal pace

Brussels: European Central Bank (ECB) president Jean-Claude Trichet said the central bank probably won't change the way it operates while returning monetary policy toward the stance prior to the financial crisis.

"We view the pre-crisis operational framework as a very natural reference point for our phasing-out process," Trichet said in a speech on Saturday at a conference at Stanford University near Palo Alto, California. The ECB has "relatively little reason to change fundamentally what has served our monetary policy well, both in normal and crisis times".

"We are convinced that a delayed exit from extraordinary liquidity support would distort market behaviour and misallocate credit," he said. "We do not wish to breed dependency."

The ECB on March 4 left its benchmark interest rate unchanged at a record low of 1 per cent and said the level remains "appropriate". The ECB started pulling back stimulus in December, when it stopped offering 12-month loans. It plans to continue lending banks as much money as they need at its benchmark rate until at least October 12.

New rules

The "speed and path of the phasing-out of non-standard measures will depend on developments in financial markets and the economy", Trichet said. "The current pace of phasing-out is appropriate."

Trichet discussed the need for reform of the financial regulation system. "Making sure that banks are well-capitalised is the foremost life jacket of our system," Trichet said. "Life-support in the form of liquidity assistance cannot act as a surrogate for appropriate management practices in the banking system."

Trichet said international cooperation is "absolutely vital" in reform efforts. "We absolutely require intelligent regulation that will prevent self-destruction," he said.

The European Commission said last month that the euro-area economy will probably expand 0.2 per cent in the first quarter after growing 0.1 per cent in the previous three months. For the full year, the economy may expand 0.7 per cent after shrinking 4.1 per cent in 2009, the Brussels-based commission forecast.

Greece's plan to cut the euro-area's largest budget deficit will win the backing of investors and credit-rating companies, Trichet said in an interview.

"At this stage my working assumption is the Greek government decision will be convincing," he said.

Greece's fiscal crisis could be exacerbated at the end of this year when the ECB is due to revert to lending rules that were loosened during the global recession. If Moody's Investors Service cuts Greece's credit rating to a level comparable to the other major ratings companies, the nation's government bonds would no longer be eligible as collateral at the central bank, making it more difficult for the country to borrow.