European Central Bank (ECB) council member Axel Weber said the ECB should help banks through end-of-year liquidity tensions before determining in the first quarter when to withdraw emergency lending measures.
“Most of these discussions about the continuation of the exit, I think, will be focused on the first quarter,” Weber, who heads Germany’s Bundesbank, said in an interview in Frankfurt on Thursday. “It’s clear that we need to re-embark on a normalization procedure.”
The euro dropped and the yield on Germany’s 30-year bond fell to a record low as Weber’s comments suggested the ECB will support the region’s banks for longer than some investors expected.
Weber, the frontrunner to succeed ECB President Jean-Claude Trichet next year, also said there are no inflation risks in sight, indicating interest rates may remain on hold for some time. His comments on the need to keep open the flow of emergency funds go beyond what Trichet has announced so far.
Weber said it would be “wise” to keep full allotment in weekly, monthly and three-month refinancing operations until after the end of the year, which is “usually surrounded by some uncertainty regarding the liquidity situation.”
Trichet has guaranteed unlimited seven-day loans, the main plank of ECB’s emergency policy, until Oct. 12 and unlimited three-month loans until the end of next month. He hasn’t outlined the bank’s timetable after that.
“His comments might perhaps be an irritation to Trichet, who always stresses his prerogative as ECB president to be the ‘porte-parole’ of the council,” said Julian Callow, chief European economist at Barclays Capital in London.
Still, his “relatively conciliatory tone” may be “representing some positioning ahead of the determination next year of Trichet’s successor as ECB President,” he said.
Weber, 53, said the ECB is likely to raise its eurozone growth forecasts next month after the German economy, Europe’s largest, expanded in the second quarter at the fastest pace since records for a reunified country began in 1991. The Bundesbank on Thursday lifted its German growth prediction for this year to 3 percent from 1.9 percent.
“Since the second quarter outpaced our expectations the euro-area projections too are likely to be revised up as a result of the German performance,” Weber said.
The euro-region revisions will be “more modest” than Germany’s because of weaker growth in some peripheral countries, he said.
The ECB in June predicted eurozone growth of 1 percent this year and 1.2 percent next year. Weber said there are no signs of inflation and indicated the ECB’s key interest rate is likely to remain at a record low of 1 percent for now.
“Since inflation risks continue to be low over the policy- relevant medium term, this does not suggest a policy tightening yet,” he said. “Rates remain appropriate.”
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