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ECB's super-easy policy may lose effectiveness over time - Mersch

Yves Mersch, Member of the Executive Board of the European Central Bank presents an oversized newly unveiled 10 euro note at the headquarters of the European Central Bank (ECB) in Frankfurt, January 13, 2014. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - The effectiveness of the European Central Bank's ultra-loose monetary policy may decline over time and some trends in bank lending already need closer scrutiny, ECB board member Yves Mersch said on Thursday. Fighting the threat of deflation, the ECB has unleashed unprecedented stimulus in recent years. It will contemplate in December whether to extend its 80 billion euros per month of asset purchases beyond March, as inflation remains far below its target of just under 2 percent. Mersch, considered a moderate hawk on the Governing Council, argued that the side effects of the bank's negative interest rate rises with time, and that cost needs to be assessed when the ECB reviews how long its bond-buying programme, known as quantitative easing, will last. "The longer the measures are in place, the less effective they may become," Mersch said in a speech. "The fact that additional lending in the euro area is losing momentum and that German banks are saying that the negative deposit facility rate is constraining lending volumes warrants attention," Mersch said. "We must be vigilant that this development does not spread to other euro area countries." Data on Thursday indicated that both corporate and household lending growth has levelled off below 2 percent, keeping the pressure on the ECB to maintain its aggressive stimulus policy for months to come. Mersch said that the benefits of the ECB's policy still prevail, but banks, who transmit the monetary policy measures to the real economy, needed to overhaul their businesses, because the rise of so-called shadow banking could lead to new risks and thwart households from saving. "Particularly in Germany, there is a need for action," Mersch said. "And this is not primarily due to the low interest rate environment." "The German banking sector is one of the largest in the euro area, but at the same time the most inefficient. The cost-income ratio of German banks stands at 73 percent, significantly higher than the rest of the euro area," he added. (Reporting by Balazs Koranyi, editing by Larry King)