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ECB to keep monetary policy loose for as long as needed

European Central Bank (ECB) Executive Board member Joerg Asmussen attends an interview with Reuters in Berlin, February 22, 2013. REUTERS/Pa
European Central Bank (ECB) Executive Board member Joerg Asmussen attends an interview with Reuters in Berlin, February 22, 2013. REUTERS/Pa

By Ingrid Melander

ORLEANS, France (Reuters) - The European Central Bank will keep its loose and growth-supportive monetary policy stance in place for "quite a long time", ECB executive board members said on Friday.

With the euro zone economy stuck in recession, the ECB cut its main refinancing rate to a record low of 0.5 percent and extended its provision of unlimited funds to banks by a year at its May policy meeting,

Inflation fell to a three-year low of 1.2 percent in April, allowing some room for maneuver.

The ECB's Joerg Asmussen told journalists in Berlin the bank's monetary policy would remain expansive for as long as needed.

His colleague Benoit Coeure hit a similar tone when speaking at a conference in Orleans in France, saying the ECB was committed to providing the euro zone with abundant liquidity for as long as necessary.

"We are saying that because we are well aware that rigidities and difficulties of transmission in the euro zone mean that the monetary policy will have to stay accommodative for quite a long time," Coeure said.

The ECB's record low interest rates do not reach euro zone countries evenly because funding costs for banks in the periphery are higher than in the euro zone's core countries. That makes it more expensive for households and companies to borrow.

ECB President Mario Draghi said last week the bank would monitor incoming data closely and would be ready to cut rates again, including the deposit rate currently at zero, which would mean it would charge banks to keep their money overnight.

Market talk that the ECB was checking with banks whether they would be prepared for such a step weighed on the euro against the dollar and German Bund future rose as much as 40 ticks to 145.71.

Tech ECB had not immediate comment.

By charging banks for overnight deposits, the ECB would give banks with excess liquidity - mainly those in core countries - an incentive to start lending again to banks in the periphery, which are for now more reliant on the ECB for funding.

Italy's central bank governor, Ignazio Visco, would be in favor of negative deposit rates. He was quoted earlier this week as saying it would be an effective way to help the euro zone economy.

But the step could also backfire as banks might pass the costs on to their customers.

(Reporting by Ingrid Melander in Orleans, Annika Breidthardt in Berlin, writing by Paul Carrel and Eva Kuehnen Editing by Jeremy Gaunt.)

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