Weber Says ECB May Take More Exit Steps in First Half

By Francine Lacqua and Simone Meier

Jan. 27 (Bloomberg) -- European Central Bank council member Axel Weber said the bank may take further steps in the first half of this year to withdraw liquidity from the banking system as the economy gathers strength.

“As the economy improves, we’ll take some of the exceptional measures back,” Weber said in an interview with Bloomberg Television at the World Economic Forum in Davos, Switzerland, today. “Not all measures are needed to the same degree, so I don’t rule out that we take some additional steps even before the second half.”

One of the cornerstones of the ECB’s strategy to fight the financial crisis has been to lend banks as much money as they want at its benchmark interest rate of 1 percent, a record low. The Frankfurt-based central bank has already started to scale back its emergency longer-term lending as the economy shakes off its worst recession since World War II.

“Weber is basically confirming a gradual winding down of all the remaining measures,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “They’re making sure that all market participants understand. They want to avoid surprising the markets.”

The euro rose to as high as $1.4097 after Weber’s remarks from $1.4072 yesterday. It was at $1.4048 as of 2:26 p.m. in London. German bonds reversed earlier gains, pushing the yield on the two-year note up 1 basis point to 1.12 percent.

‘Gradual Process’

The ECB last month said its third offer of 12-month loans to banks in December was its last and also announced it will discontinue six-month loans after March. President Jean-Claude Trichet said the provision of unlimited cash in other refinancing operations will continue until at least April 13.

Weber, who is also head of Germany’s Bundesbank, said the ECB will have to discuss a return to a normal auction procedure, though this would not be reintroduced to all tenders at once. Normalization will be a “gradual process,” he said.

“The economy took a really steep fall, it’s been stabilizing” and will show a “protracted recovery,” Weber said. “We still have some bad news ahead of us.”

Inflation Risks

In the euro region, a recovery is already losing some momentum as governments phase out stimulus measures and companies continue to cut jobs, eroding consumer demand. Expansion in Europe’s manufacturing and services industries unexpectedly weakened in January and investor confidence in Germany, Europe’s largest economy, declined.

ECB Executive Board member Juergen Stark said yesterday that council members “expect only moderate growth” and “probably a bumpy recovery” this year. “Overall, I wouldn’t expect a fast return to robust growth,” he said.

The ECB last month forecast the euro-region economy will expand about 0.8 percent this year and around 1.2 percent in 2011. Inflation will average about 1.3 percent this year and 1.4 percent in 2011, the projections show. Weber said today that there are “upside risks” to the inflation outlook.

“Some measures are going to move inflation up but we don’t expect it to significantly surpass 2 percent,” he said. “I’m not worried. I think rates are appropriate at this point.”

Weber said he expects the Eonia overnight rate, or the interest European banks charge each other for overnight loans, to “gradually” move from the 0.25 percent deposit rate toward the ECB’s benchmark interest rate this year. It’s “going to be a slow process” and depends on a market normalization, he said.

“The decisive remark is that the withdrawal of unconventional measures isn’t time dependent but condition dependent,” said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “The logical steps would be for the ECB to mop up liquidity, remove the full allotment, push the Eonia rate toward 1 percent and then hike.”

Weber declined to comment when asked whether he’s among the potential candidates to replace Trichet in 2011, saying that the bank has a “very good” president at the moment.

To contact the reporters on this story: Simone Meier in Dublin at smeier@bloombert.net; Francine Lacqua in Davos at flacqua@bloomberg.net.