Draghi - ECB ready to act if market rates rise too high

WASHINGTON (Reuters) - European Central Bank President Mario Draghi said the central bank is looking carefully at money market interest rates and is ready to act if they rise too high.

The ECB has expressed worries that rising money market interest rates could choke off a nascent euro zone recovery.

To reduce volatility and keep a lid on market rates, the ECB abandoned in July its traditional policy of never pre-committing on future rates, saying it would keep its interest rates at present or lower levels for an "extended period" - its first use of forward guidance.

Draghi repeated that guidance in the speech given at the International Monetary Fund's annual meetings in Washington.

"With regard to money market conditions, the ECB will remain particularly attentive to developments which may have implications for the stance of monetary policy and is ready to consider all available instruments," Draghi added in a statement dated Saturday, but made available on Friday.

The economic assessment provided by Draghi followed very closely the Governing Council's opening statement published after the ECB's October 2 policy meeting, when the central bank kept interest rates on hold at record-low 0.5 percent.

Draghi also said the ECB was also seeking ways to ensure low interest rates profit all euro zone countries. Small firms in particular still have to pay much more for a loan in the debt-ridden south than in core euro zone countries, a development which has caused headache for the ECB.

"We will remain attentive to all developments that influence an adequate transmission of monetary policy to the financing conditions in euro area countries," Draghi said.

Turning to the planned euro zone banking union, the central bank chief said the upcoming bank balance-sheet examination by the ECB will be "an important confidence-building tool".

Weaker euro zone countries, which have seen their borrowing costs shoot up during the sovereign debt crisis, were well-prepared for the exercise.

"It is also noteworthy that strong efforts to repair bank balance sheets and enhance transparency have already been undertaken in all euro area countries, especially in those that have experienced severe stress," Draghi said.

However, public funds that may need to be used for bank recapitalisations should be in place in case the bank asset-quality review finds capital holes in need of plugging.

"The effectiveness of this exercise will also depend on the availability of necessary arrangements for recapitalising banks, if and when needed, including through the provision of a public backstop, if private funds cannot be acquired," Draghi said.

"These arrangements must be in place before we conclude our assessment."

(Reporting by Krista Hughes, writing by Sakari Suoninen, editing by Paul Carrel)