UPDATE 2-Weber backs extending ECB bank lending to 2011

* ECB’s Weber says wise to extend unlimited lending

* Says exit discussions to be focused on Q1 next year

* See low inflation risk, no tightening yet

(Adds Honohan quotes, market and analyst reaction)

FRANKFURT, Aug 20 (BestGrowthStock) – The European Central Bank
should extend unlimited lending to banks past the end of the
year and resume exit discussions in early 2011, Governing
Council member Axel Weber was quoted on Friday as saying.

Financial markets had been expecting the ECB would decide
next month to keep in place its remaining emergency support for
still-stressed bank-to-bank lending, eschewing any aggressive
withdrawl of stimulus.

Weber, however, is regarded as one of the ECB’s most
outspoken inflation fighters and his comments in favour of
maintaining loose policy sent the euro (EUR=: ) down 1 percent to
a five-week low against the dollar. It fell to a seven-week low
against the yen (EURJPY=R: ).

News agency Bloomberg reported that 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.
“Most of these discussions about the continuation of the
exit I think will be focused on the first quarter,” Weber said
in an interview conducted on Thursday.

The comments bring the Bundesbank chief in line with fellow
policymakers such as Athanasios Orphanides and Patrick Honohan,
who have also signalled the ECB’s liquidity largesse will
continue.

The ECB is due to make a decision about whether to extend
unlimited lending at the weekly, monthly and three-monthly
operations at its next meeting on Sept. 2 and Weber’s comments
bolster expectations it will be renewed until January.

“Since Mr Weber has historically positioned himself at the
hawkish end of the Governing Council spectrum, his comments
strongly signal that the ECB is likely to decide to continue
with its current operations till at least early 2011,” Barclays
Capital economists Julian Callow and Laurent Fransolet said.

The ECB has said that unlimited liquidity will be on offer
in the shorter term, one week and one month operations until at
least mid-October, and until the end of September for
three-month money.

The end of the year was “usually surrounded by some
uncertainty regarding the liquidity situation,” Weber said.

NORMALISATION

Weber stressed though that the improving economic outlook
meant generous liquidity supplies could not be kept in place
indefinitely and said he saw no need to offer more very
long-term funds, such as over six months.

“It’s clear that we need to re-embark on a normalization
procedure,” he said.

Weber, who is one of the frontrunners to replace Jean-Claude
Trichet next year as ECB president [ID:nLDE67J0R5], said
financial markets remained fragile. Yields on 10- and 30-year
German bonds marked record lows on Friday, widening the gap from
other sovereigns.

Irish 10-year bond yields over Bunds remain at more than 300
basis points (IE10YT=TWEB: ) and Irish central bank governor and
fellow ECB policymaker Patrick Honohan said spreads were still
uncomfortably high.

“Spreads are still higher than I would like to see,” Honohan
told reporters in Tokyo on Friday when asked about the results
of an Irish debt auction this week. [ID:nTOE67J062]

Honohan has said he sees a gradual recovery in the 16-nation
euro zone and Weber joined other policymakers in flagging an
increase in ECB staff growth forecasts, also due in September.

“Since the second quarter outpaced our expectations the
euro-area projections too are likely to be revised up as a
result of the German performance,” he said.

Europe’s largest economy last week posted growth of 2.2
percent in the second quarter — the fastest expansion since
reunification — and the Bundesbank revised up growth forecasts
for 2010 to 3 percent. [ID:nLDE67I1CW]

Weber said he did not see inflation risks, and confirmed the
ECB’s position that benchmark interest rates are “appropriate”
at the current 1 percent.

“Since inflation risks continue to be low over the policy-
relevant medium term, this does not suggest a policy tightening
yet,” he said.
(Reporting by Krista Hughes, additional reporting by Stanley
White in Tokyo; Editing by Patrick Graham and Susan Fenton)

UPDATE 2-Weber backs extending ECB bank lending to 2011