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," Weber, who
heads Germany's Bundesbank, said. "It's clear that we need to re-embark on a normalisation 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 would support the region's banks for longer than some investors expected.
Weber, the frontrunner to succeed ECB President Jean-Claude Trichet next year, 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 in London. "I would have expected that he wanted to start the exit sooner."
The euro fell more than a cent after Weber's remarks were published to US$1.2664, a five-week low. German government bonds erased their declines, with 10-year and 30-year yields dipping to record lows of 2.263 per cent and 2.895 per cent 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.
Weber's 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 October 12 and unlimited three-month loans until the end of September.
Weber said six-month loans should be allowed to expire. "Resuming the exit will depend on the "health of the financial system and the banking system," he said.
The comments indicate the ECB is more confident the euro region is coping with its sovereign debt crisis.
- Bloomberg
