Sept. 6 (Bloomberg) -- European Central Bank Governing Council member Ewald Nowotny said policy makers will wait until December before discussing how to withdraw emergency measures to give the economy time to gather strength.
"We certainly won't discuss the first quarter before December of this year" Nowotny told Bloomberg News in an interview in Bucharest today. "We're still facing an economic development with a very high uncertainty in many respects. It's certainly too early to take a clear position."
The ECB on Sept. 2 extended emergency measures for banks into 2011 to give them more time to patch up their balance sheets as the euro-region recovery shows signs of weakening. While the bank wanted to phase out that policy tool earlier this year, the region's fiscal crisis forced a rethink. President Jean-Claude Trichet said last week that risks to the economic outlook are "tilted to the downside."
The Frankfurt-based ECB last week kept its benchmark interest rate at a record low of 1 percent. Nowotny called borrowing costs "appropriate" and said that the bank will determine its exit based on revised economic projections in December.
"The current rate levels are extraordinarily low over the longer term, which means that we'll certainly start a normalization process as soon as possible, starting on the liquidity-provision side," he said. "It's definitely the ECB's policy to set an exit strategy from extraordinary measures that's in line with overall economic projections."
Faster Growth
Nowotny's remarks echo comments by his German colleague Axel Weber, who said in an interview on Aug. 19 that "most of these discussions about the continuation of the exit" will be "focused on the first quarter" of 2011. Weber, who heads the Bundesbank, also said that it's "clear" that the bank will need to re-embark on a normalization procedure.
The ECB said last week that it expects the 16-member euro region to expand about 1.6 percent in 2010 and around 1.4 percent in 2011. It previously forecast growth of 1 percent and 1.2 percent this year and next respectively.
The euro-region economy may struggle to gather strength after expanding at the fastest pace in four years in the second quarter as a global slowdown threatens to hurt exports just as governments step up efforts to reduce budget deficits by raising taxes and cutting spending.
Euro Drop
Nowotny said that while he doesn't expect a double-dip recession in the U.S. or the euro-region economy, the ECB remains "very cautious" about the economic outlook.
"The European economy still shows an insufficient dynamic," he said. "There's still the risk of a longer phase with low growth rates accompanied by low inflation rates, which will make it really difficult to achieve a sustainable fiscal improvement."
Investor concern about governments' inability to reduce their budget deficits has pushed down the euro 10 percent against the dollar this year. The single currency depreciated 19 percent against the yen over that period.
Nowotny said that he doesn't see a need to act on the euro.
"One shouldn't dramatize or over-interpret exchange-rate developments," he said. "I believe that it's the right policy to follow a steady-hand approach, which means that one isn't influenced too much by short-term market developments."
To contact the reporter on this story: Christian Vits in Bucharest at cvits@bloomberg.net