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ECB's Coeure says bank eyeing money market rates closely: paper

Benoit Coeure, executive board member of the European Central Bank (ECB) poses for a photo after an interview with Reuters in Frankfurt Febr
Benoit Coeure, executive board member of the European Central Bank (ECB) poses for a photo after an interview with Reuters in Frankfurt Febr

STOCKHOLM (Reuters) - The European Central Bank is closely watching money market rates and will make sure they don't rise too far, ECB policymaker Benoit Coeure said in an interview in a Swedish newspaper published on Saturday.

Money market rates have increased on the back of comments by U.S. Federal Reserve Chairman Ben Bernanke that U.S. policy makers could begin to cut back on extraordinary stimulus measures.

Some market players believe that the Fed could start tapering its $85 billion a month bond buying program as early as next month.

Furthermore, European banks have been paying back long-term loans taken from the ECB during the crisis, removing excess liquidity from the market and pushing up rates.

"We are watching this process closely and will make sure that money market rates remain at reasonable levels," Coeure said in an interview in business daily Dagens Industri.

Banks took more than 1 trillion euros of three-year loans from the ECB in two LTROs in December 2011 and February 2012, of which the first matures in January 2015.

They now have the option to repay the loans early and have returned almost a quarter of the money already.

On Friday. The ECB said banks would pay back 4.646 billion euros in LTRO loans next week.

The ECB could cut interest rates to address the tightening liquidity situation, while another ultra-long-term funding operation could be an option.

The euro zone economy emerged from recession in the second quarter and a survey last week showed business activity across the euro zone picked up this month at a faster pace than expected.

However, recovery is likely to be slow, Coeure said.

"In the Euro zone, we are not in the position where we can begin normalizing monetary policy," Coeure told business daily Dagens Industri.

"As you know, the ECB's Governing Council has unanimously said that rates are going to remain low, at the present level or lower, for an extended period of time."

He said recent data confirmed a recovery is in place, but that there were reasons to be cautious.

"It (recent data) doesn't necessarily mean we have to revise our expectations for future growth, but only confirms that we are over the worst," he said.

The ECB holds its next policy meeting on September 5.

(Reporting by Simon Johnson)

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