European Central Bank 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," Mr Weber, who heads Germany's Bundesbank, said in an interview with Bloomberg Television in Frankfurt yesterday. "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 Mr Weber's comments suggested the ECB will support the region's banks for longer than some investors expected. Mr 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.
"The comments are rather dovish, he seems to be very cautious," said Juergen Michels, chief euro-area economist at Citigroup Inc in London. "I would have expected that he wanted to start the exit sooner."
The euro fell more than a cent after Mr Weber's remarks were published to $1.2685, a five-week low. German government bonds erased their declines, with 10-year and 30-year yields dipping to record lows of 2.3 percent and 2.95 percent respectively.
The escalation of Europe's fiscal crisis in May forced the ECB to halt its withdrawal of support for the region's banks and reintroduce some tools, such as unlimited three-month loans.
Mr Weber's comments on the need to keep open the flow of emergency funds go beyond what Trichet has announced so far. He 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."
Mr 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 September. He hasn't outlined the bank's timetable after that.
Six-month loans should be allowed to expire and "I don't think it would be wise to continue with these very long operations," Weber said. Resuming the exit will depend on the "health of the financial system and the banking system," he added.
The comments nevertheless indicate the ECB is growing more confident that the euro region is coping with its sovereign debt crisis after Germany powered the 16-nation region to its fastest economic growth since 2006 in the second quarter. By contrast, the Federal Reserve was this month forced to announce fresh measures to shore up a stuttering US economy.
Mr Weber (53) said the ECB is likely to raise its euro-region 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.
Bloomberg