ECB Officials Say Liquidity Steps Will Take Time to Calm Market

By Meera Louis and Gabi Thesing

Oct. 11 (Bloomberg) -- European Central Bank policy makers led by President Jean-Claude Trichet said it will take time for their liquidity measures to soothe markets, suggesting another interest rate cut isn't imminent.

``We have taken a lot of actions in the past days and weeks,'' Trichet told reporters in Washington yesterday after a meeting of Group of Seven finance officials. ``It is normal that there is a maturing process.''

Global policy makers have so far failed to reverse a credit crunch even after cutting interest rates in an emergency move this week and pumping banking systems with cash. Economists at Royal Bank of Scotland Group Plc yesterday predicted the ECB may reduce rates again before its governing council is next scheduled to meet on Nov. 6.

The Frankfurt-based bank this week lowered its key lending rate by half a percentage point to 3.75 percent as part of a coordinated easing of monetary policy with global counterparts. It also offered banks unlimited funding every week at the main refinancing rate.

Still, the cost of borrowing euros for three months stayed close to a record high and European stocks recorded a 22 percent drop this week, the biggest since records began in 1987.

ECB council member Erkki Liikanen said in Washington that the markets need to accept that these ``measures take time to work.'' Colleague Christian Noyer said market participants should refrain from demanding new central bank actions if there is no immediate reaction.

`Will Never Stop'

``If we continue like this it will never stop,'' he said.

Mario Draghi, another member of the ECB's board, said investors had not fully appreciated that the central bank was ready to cut borrowing costs, which were increased as recently as July to a seven-year high of 4.25 percent.

``The market had discounted the interest-rate cut,'' Draghi said. ``The point of the action, why it was different, was because it was coordinated.''

Jacques Cailloux, chief euro-area economist at RBS, said yesterday that the spreading financial crisis meant a ``very significant chance'' of a cut before Nov. 6. Citigroup Inc. economists predicted the ECB will soon expand the types of collateral it accepts when making loans.

Inflation slowed to 3.6 percent last month from a 16 year- high of 4 percent in July, still above the central bank's 2 percent limit. Noyer said yesterday the ECB would achieve stable prices by ` somewhere in the middle of 2009,'' which is a year earlier than policy makers had previously expected.

Trichet vowed to ``guarantee'' price stability and ``continue to act in line with the solid anchoring of inflation expectations.''

To contact the reporters on this story: Gabi Thesing in Washington at gthesing@bloomberg.net; Meera Louis in Washington at mlouis@bloomberg.net