Draghi says ECB will act if needed to control money markets

European Central Bank President Mario Draghi said he’s ready to take any necessary measures to keep money-market rates in check as he tries to steer Europe’s banks through the early stages of an economic recovery.

“We’ll remain particularly attentive to developments which may have implications to monetary policy and consider all available instruments,” Draghi said at a press conference in Paris today, reiterating comments he made last month. “We have a vast array of instruments to this extent and we exclude no option in order to address the needs as is most appropriate.”

Draghi spoke after the ECB’s Governing Council left its main refinancing rate at a record low of 0.5% for a fifth month. The decision was predicted by all 52 economists in a Bloomberg News survey. Officials held the deposit rate at zero and the marginal lending rate at 1%.

The ECB is trying to contain volatility in market rates as investors face risks ranging from a squeeze on excess liquidity to stress tests on banks’ balance sheets. Draghi repeated today that the ECB is prepared to announce another long-term refinancing operation for Europe’s financial system if needed.

The euro climbed as Draghi spoke, rising as high as $1.3577 from $1.3523 at the start of the press conference. The yield on Germany’s two-year government bond climbed one basis point to 0.18%.

Credit Crunch

The ECB pumped more than 1 trillion euros ($1.4 trillion) of three-year loans into the financial system during the region’s debt crisis and gave banks the option to repay the emergency cash early. As banks do that, excess liquidity in money markets is declining, pushing borrowing costs higher.

The overnight rate that banks expect to charge each other by the ECB’s September 2014 rate meeting, as measured by Eonia forward contracts, was at 0.22% today. While that’s down from 0.3% on Sept. 5, the date of the ECB’s last rate decision, it compares with less than 0.1% in May.

The ECB president said today that policy makers considered a cut in its main interest rates and decided against it. Draghi has pledged since July to keep the rates at or below the current level for an extended period of time.

Growth Signs

The health of the euro region’s economy has shown signs of improving since last month’s ECB meeting. Economic confidence as measured by the European Commission rose for a fifth month and a gauge of factory output showed a third month of expansion.

Draghi said that lending to households and companies, which fell by a record in August, may start to rise before the ECB completes a review of bank balance sheets next year.

“We have frankly strong hopes that credit will recover before the end of the asset quality review,” he said. “The asset quality review and the stress test are foreseen before we take over. I and the Governing Council hope that credit will have recovered by then.”

The ECB holds its meetings outside of its home city of Frankfurt twice a year. The October meeting is a day earlier than normal because of a public holiday in Germany tomorrow.

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