'ECB must focus on banks instead of capital markets'

The European Central Bank should focus on banks instead of capital markets in any non-traditional measures it decides to take, ECB Governing Council member Axel Weber said yesterday.

He also said the ECB should use the room its still has to cut its main refinancing rate but maintained that one per cent should be as low it goes.

"On the main refinancing rate, there is still a little room, which we also should use, taken into account price development," Weber, who also heads the Bundesbank, said in a speech at the Hamburg World Economy Institute. "I am critical of lowering it below one per cent, because offering loans on excess liquidity would not be rewarded any more," he added, saying there is a danger interbank money markets could come a complete halt if rates are too low.

The ECB has cut its benchmark rate by 300 basis points since October and is expected to cut it to one per cent at its May 7 meeting from the current level of 1.25 per cent. ECB President Jean-Claude Trichet has also promised to lay out the bank's quantitative easing ambitions then and economists are now busy speculating whether it will follow the US Federal Reserve, the Bank of England and the Bank of Japan down the path of asset purchases.

A steady trickle of hints from policymakers suggests the ECB will combine an expansion of its lending operations with a bolder move to buy up company debt from banks.

Weber said any measures the ECB takes should reflect the important role banks have in the euro zone.

"Additional easing of refinancing by banks, for example in the form of extending maturities of liquidity operations, should have priority. Direct intervention into capital markets should take a backseat," he said.

About 70 per cent of corporate financing in Europe comes in the form of more traditional bank loans.

Weber's Greek counterpart George Provopoulos said more needed to be done to ensure businesses and households benefit from the ECB's record run of rate cuts. Weber said a Bundesbank study from October to February had showed roughly 75 to 80 per cent of the ECB's rate cuts have been passed on when looking at short-term corporate loans.

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