More liquidity coming from ECB to avoid 'cliff': Nowotny
The European Central Bank will provide more liquidity to avoid a "cliff" effect once long-term refinancing operations (LTROs) – the bank's cheap loans to euro zone banks – come to an end, Governing Council member Ewald Nowotny told CNBC.
"Concerning the liquidity, the main challenge is of course that a large part of our liquidity provision is via the LTRO, the long-term liquidity provision," Nowotny told CNBC in an interview.
"What we want to avoid of course is that at the ending of this program we have some sort of cliff effect. There are several ways to avoid this, but it's quite clear that we are careful not to have some kind of sudden effects. But this is something that will come."
(Read more: ECB keeps all options open to support recovery)
He said there was "no practical urgency" to address the provision of liquidity in the euro zone, but argued it was better to inform markets at an early stage. "Of course there are different ways to provide this liquidity. This is a discussion that is still going on. But I think we will be able to give results rather soon," he added.
He refused to comment on what kind of new liquidity provision the bank could introduce – whether it come in the form of another LTRO or shorter-term six month repurchase agreement (repo) arrangement- but hinted that it could differ from country to country.
"With the regard to the need for ECB liquidity, we do see quite a different situation in different countries. So, for instance, in my own country, in Austria, banks de facto right now have no need at all for ECB liquidity. There are other countries of course where the banking system is much more dependent so there is also, not only a timing issue, but also a structural issue."
His comments come after ECB President Mario Draghi indicated in September that the bank was prepared to offer banks more long-term loans to keep money-market interest rates low, if necessary.
"We are ready to use any instrument, including another LTRO if needed, to maintain the short-term money market rates at a level which is warranted by our assessment of inflation in the medium-term," Draghi told the European Parliament in his quarterly testimony.
The central bank has room to increase liquidity as inflation in the euro zone remains under the central bank's target and the strong euro actually points to deflationary pressures.
Europe's banks have been at the heart of the euro zone's financial crisis. The ECB has already offered two rounds of cheap, three-year loans to coax them to lend to businesses and consumers again.
Nowotny dismissed concerns over the strength of the euro, which has risen 2.8 percent against the dollar since the U.S. Federal Reserve decided to delay the tapering of its asset purchase program on September 18.
"Historical evidence clearly shows there have been rather strong fluctuations between the euro and the dollar in the past. As long as the present development more or less fits into this historical context, I would not see any major cause for major concern," he said.
Rather, he stressed that it was important for fiscal discipline to be implemented in the euro zone and that the pace of fiscal consolidation being carried out by governments "could be faster."
"There might be some arguments in some of these countries, that indeed the pace, the velocity of fiscal consolidation could be faster. And I think there is indeed a necessity [for] some kind of requirement that they go on with this kind of fiscal consolidation," he said.
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