ECB’s Stark talks up recovery, Trichet urges caution

By Marc Jones and Sarah Ktisti

WIESBADEN, Germany/PAPHOS, Cyprus (BestGrowthStock) – European Central Bank policymaker Juergen Stark talked up improvements in the euro zone’s economy and lending markets on Wednesday, as the bank restarted the slow process of removing its crisis support.

Forward-looking indicators this month have suggested Europe’s recovery was more resilient to a swathe of budget cutbacks than was previously thought, helped by powerful growth in Germany, its largest economy and industrial core.

“Despite all the risks and uncertainties …. in some parts of the euro zone, we are close to a self-sustaining economic recovery,” Stark, a member of the ECB’s Executive Board, said at a KPMG conference.

Fellow ECB policymaker Yves Mersch hinted on Tuesday that ECB staff could raise growth forecasts when they are updated in December and sentiment indicators for Germany and the euro zone have largely been better than forecast.

But ECB President Jean-Claude Trichet stuck to his earlier message that the ECB would not declare the economic crisis was over and remains cautious even after a surprisingly good second quarter.

“We never declare victory (on the economy),” Trichet told a news conference at a Euromed meeting of central bankers from the euro zone and countries surrounding the Mediterranean Sea.

“Even if we had good surprises, we remain very prudent and very cautious.”

He declined to comment when asked whether the ECB could raise its staff forecasts.

Figures on Wednesday showed French consumption rose three times faster than expected last month, while Europe’s largest carmaker Volkswagen (VOWG_p.DE: ) detailed what one analyst described as “blowout” third quarter results on bumper Audi sales.

Germany’s headline unadjusted jobless total also fell in October to its lowest since October 1992.

But there were also figures showing loan growth was still sluggish, underlining the problems companies, consumers and authorities face as they head into a year of eye-watering cuts in public spending in many countries.

Stark stuck to the ECB’s recent assessment that the euro zone’s economic recovery would continue at a moderate pace and that there was currently neither a risk of overly strong inflation or deflation in the 16-country bloc.

“The fact that broad money and overall credit growth have moved back into positive territory is encouraging,” said Martin van Vliet from ING. “But the still sluggish growth rates highlight the underlying fragility of the economic recovery.”

CIGARETTES AND ALCOHOL

Heineken (HEIN.AS: ), the world’s third-largest brewer blamed poor weather and austerity measures for disappointing third-quarter sales on Wednesday. The world’s No. 2 cigarette maker British American Tobacco (BATS.L: ) also warned the recession’s impact showed no sign of abating.

In a question and answer session after his speech Stark said that growth in key advanced economies was likely to be lower than pre-crisis levels and warned that the U.S. may not provide the same global economic impetus as in the past.

“There is a high possibility that the U.S. won’t be the growth engine of the global economy as before,” he said.

Stark was also upbeat about improvements seen in euro zone money markets, the area where the ECB has directed much of its efforts to tackle the financial crisis.

Banks have slashed their consumption of ECB loans in recent months and reduced the amount of cash they hoard at the central bank. Reuters data also show overnight bank-to-bank trading volumes have almost trebled since June.

“There is (a) clear trend of normalization,” Stark said in his speech. “We are in a process of gradually phasing out… In no circumstance will the remaining (support) measures be retained longer than necessary to ensure stable prices in the euro zone.”

Trichet said banks had been requesting less liquidity on the whole.

“We will continue to be very, very careful in observing the situation with great pragmatism,” he said.

The ECB held its first ‘indexed’ three-month refinancing operation on Wednesday, a baby step in its efforts to wean banks off the emergency support it has given since the financial crisis worsened in 2008.

Banks borrowed 42.5 billion euros, 10 billion more than traders were predicting in the run-up to the operation but the high demand was put down to the price of the funds rather than any renewed market tensions.

“Banks must have found it interesting to secure funds at a rate cheaper than three-month Euribor, especially given the outlook for further increases in money market rates,” said UniCredit MIB strategist Luca Cazzulani.

SANCTIONS

The ECB is expected to keep euro zone interest rates at a record low of 1 percent for the 18th month running at its November meeting next Thursday.

“The current monetary policy remains accommodative. This orientation is, from today’s perspective, still appropriate,” Stark said, also warning that keeping rates low for too long carried substantial risks.

With EU leaders set to meet on Thursday to finalize new fiscal rules, Stark also repeated the ECB’s calls for more automatic sanctions for budget offenders, while Trichet said he had nothing to add to his recent comments. He will travel to Brussels on Thursday to participate in the EU meeting.

A political Franco-German deal last week jettisoned original plans to have a system of near-automatic punishments for deficit sinners, but Stark appeared to have not given up hope.

“The process is not closed, there is an EU summit tomorrow,” he said. “We need stronger binding rules therefore accompanied by automatic graduated sanctions for rule breakers. And we need institutional reform, incentives to eliminate misconduct.”

(Editing by Patrick Graham)

ECB’s Stark talks up recovery, Trichet urges caution