European Central Bank says has tools left to act if needed

(Reuters) - The European Central Bank still has room to maneuver should the euro zone economy continue to worsen after it cut interest rates to a new record low last week, ECB policymakers said on Wednesday.

The ECB cut its main rate to 0.5 percent last Thursday.

Yves Mersch, a member of the ECB's six-man Executive Board, said the bank still had tools at its disposal, but added that it could only spur lending to small euro zone companies in conjunction with other European institutions.

His colleague Joerg Asmussen said the ECB had an open mind about what it could do to revive lending to small- and medium-sized enterprises (SMEs) - a growing concern for the central bank, particularly in the crisis-stricken periphery countries.

"We still have tools in our toolbox, we are not a toothless tiger," Mersch said in a panel discussion in the northern German city of Aachen.

The ECB said last week it had set up a task force with the European Investment Bank (EIB) to assess ways to unblock lending to SMEs, for example by promoting a market for asset-backed securities (ABS) based on SME loans.

ABS would allow banks to pass some credit risk on to other investors, enabling them up to lend more.

The move to promote ABS is controversial, particularly in Germany, as during the financial crisis such securities became toxic due to the default of housing loans that underpinned them.

Asmussen said the ECB's work was ongoing.

"We have an open mind to look at all things that we can do within our mandate and this relates to how can the market for asset-backed securities, especially backed by SME loans, be revived in Europe," he told a European Parliament committee.

Asmussen was responding to a question about a Wednesday article in German newspaper Die Welt, which cited a central bank source as saying a majority of ECB Governing Council members seemed to be in favor of the central bank buying ABSs itself.

Mersch said he was more skeptical about direct asset purchases by the ECB to ease SME funding strains as these measures would be more difficult to exit than central bank lending operations.

"We will not subsidize markets, we will not overtake markets, that is not the task of monetary policy," Mersch said. "We will be sure not to overstep our mandate."

NO DEFLATION DANGER

Asmussen, a German and generally a more hawkish member of the 23-man Governing Council, said the central bank was studying what it could do but that other EU institutions may be better placed to spur lending to SMEs.

The ECB could help with the provision of liquidity, Asmussen said, adding: "I think we have done a lot here."

The ECB has cut interest rates to a record low, flooded the banking sector with more than 1 trillion euros ($1.3 trillion)in ultra-cheap three-year loans, loosened its collateral framework and launched an new yet-to-be-used government bond purchase program.

But the euro zone economy is still in recession. Unemployment hit a record high in March and inflation fell to 1.2 percent in April, far below the ECB's goal of below, but close to 2 percent.

Mersch said inflation expectations were stable, "as far as the eye can see".

"The risk of deflation is also not bigger than 10 to 15 percent, according to economic forecasts. It is not an immediate danger and we do not have to steer against it," Mersch said.

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