ECB´s Liikanen says further stimulus possible, Citi agrees

The European Central Bank stands ready to add to its monetary stimulus to boost growth and inflation should it be deemed necessary, a top rate-setter said on Monday.

Speaking from Helsinki, ECB governing council member Erkki Liikanen said the monetary authority was not out of tools to prop up growth, including the possibility of further cuts to interest rates.

"The monetary policy measures and forward guidance [announced by the ECB on 10 March] together constitute a comprehensive response. The new measures will accelerate the return of inflation to levels below but close to 2%, and support the recovery of the euro area economy," Liikanen said.

"If the outlook or financing conditions deteriorate, the ECB still has capacity to boost inflation and growth."

Significantly, he added that the ECB expected its official interest rates "to remain at present or lower levels for an extended period of time, and well past the horizon of the asset purchases."

On 10 March, the ECB unexpectedly lowered all its main interest rates, expanded the size of its monthly asset purchase programme, moved to include corporate bonds among the range of assets which were eligible to be bought and unveiled new long-term liquidity auctions for Eurozone lenders.

However, during the post-meeting press conference ECB president Mario Draghi said that at the time the governing council did not foresee a need for further rate cuts, which markets took as a signal that the governing council preferred not to carry out any additional reductions.

That sent the single currency vaulting higher, contributing to tighter financial conditions across the currency bloc, as some analysts pointed out.

In any case, economist Guillame at Citi, for one, did expect further rate cuts.

The ECB´s new measures would succeed in improving the transmission of its policy via banks but more cuts to the interest rate for its main refinance operations and further adjustments to its asset purchase programme were likely, probably from September 2016 onwards, Guillame said in a research report sent to clients.

Liikanen also emphasised how critical banks´ health was to the effective transmission and success of monetary policy in the euro area.