UPDATE 2-ECB in exit mode from crisis measures -policymakers

* Stark, Mersch say ECB still in exit mode

* Comments put pressure on interest rate futures

* Banks prepare for bumper loan repayment

* Makuch says no reason to change exit strategy

(Adds Makuch)

By Alexandra Hudson and Marc Jones

ISTANBUL/FRANKFURT, Sept 28 (BestGrowthStock) – The European Central
Bank is still in the process of phasing out its emergency
lending measures, policymakers said on Tuesday, despite a recent
extension of the central bank’s liquidity lifelines.

ECB Executive Board member Juergen Stark said the ECB had
already decided not to renew some of its liquidity support past
the end of the year, when the next decision on the supply of
funds is due.

“We are in the process of phasing out the non-standard
measures. This week and in the fourth quarter 2010 a number of
non-standard measures will mature and they will not be renewed,”
Stark said on the sidelines of a conference hosted by the
Turkish central bank in Istanbul.

“We are in this process and what we will decide for the time
after the time of Dec. 31 is up to a forthcoming meeting.”

Bund and interest rate futures fell on his comments as
traders bet on higher credit costs, with Stark’s hawkish tone
mirrored by Luxembourg colleague Yves Mersch.

“We had slightly hawkish comments from the ECB by Stark on
the non-standard measures … he is known as a hawk but it’s
still significant and is putting pressure on the front end,” one
bond trader said. [ID:nLDE68R0W8]

The most actively traded March Euribor futures contract
(FEIH1: ) fell as much as 2.5 basis points to 98.900, implying a
Euribor rate of 1.1 percent by the end of March next year.

The three-month Euribor fixed at 0.88 percent on Tuesday.

The ECB is allowing very long-term loans of up to 12 months
to expire and replacing them with shorter-term operations,
although liquidity supplies are currently still ample.

The ECB this month renewed its policy of lending banks
unlimited funds for up to three months into January 2011, but
has made it clear it wants to resume its gradual exit from
emergency loans at some point.

Slovakia’s Jozef Makuch, one of the ECB’s Governing Council
members, said he saw no need to tweak the bank’s strategy.

“We see no reason to change the exit strategy, and there is
no such discussion,” Makuch said in Bratislava, and added he did
not expect to see any problems in the financial markets when the
ECB’s 12-months loans expire later this year.

RECOVERY

Luxembourg’s Mersch said signs that the euro zone’s recovery
is becoming self-sustainable meant the ECB could continue to
gradually normalise monetary policy and withdraw lending
support.

“I am confident that the positive underlying momentum is
increasingly broader-based and signals a self-sustaining
recovery in the euro area,” he said in the text of a speech
given in Shanghai.

“In my view, therefore inside the euro area the gradual pace
of adjustment of the monetary policy stance, of the overall
provision of liquidity and of its allotment modes can continue.”

Banks are preparing to repay 225 billion euros of 12-, six-
and three-month funds to the ECB on Sept. 30 — more than a
third of outstanding ECB lending — although traders polled by
Reuters expect banks to reborrow 90 percent of the funds over
six days and three months.

There are some signs that two years of generous liquidity
supply are starting to feed through to the real economy, with
data on Monday showing growth in loans to firms and households
at its fastest in 14 months.

Stark said: “We have very likely seen a turning point to
positive credit growth and this is a positive sign. We have to
be prudent in assessing the numbers.”

Speaking in Helsinki, Finland’s Erkki Liikanen, another ECB
Governing Council member, said that the bank’s monetary policy
stance was supportive of growth and that its key policy rates
were appropriate.

“As a result of the crisis, many other advanced economies
are also facing the prospect of a lower growth trajectory than
they were used to before the recession,” Liikanen said in the
Bank of Finland’s latest economic outlook.

The ECB is expected to leave interest rates on hold at a
record low 1.0 percent next week, and analysts see no change
until late 2011. [ECB/INT]

News agency MNI reported that Mersch told a briefing in
Shanghai that the economic recovery had gained momentum since
the financial crisis, which had also slashed inflation.

“We will see inflation will be around 1.5 percent or maybe
slightly higher in the years to come,” Mersch said.

The ECB aims to keep inflation below but close to 2 percent.
(Additional reporting by Martin Santa in Bratislava and Terhi
Kinnunen in Helsinki, writing by Krista Hughes, editing by Hugh
Lawson)

UPDATE 2-ECB in exit mode from crisis measures -policymakers