FRANKFURT, Nov 17 (Reuters) - Central banks should tighten policy even in the absence of short-term inflationary pressures to avoid credit growth getting out of control, European Central Bank Executive Board member Juergen Stark said on Tuesday.
"In situations of excessive money and credit growth, monetary policy needs to be more restrictive than warranted on the basis of short-term inflationary trends," Stark said in the text of a speech to be given at the Frankfurt Finance Week.
"Monetary policy with a prespecified, fixed-term policy horizon runs the risk of having too short-sighted a perspective of the economy."
Stark's comments back the idea that by raising interest rates as asset prices show early signs of spiralling, central banks can limit the emergence of financial bubbles.
"While such a "leaning-against-the-wind" approach would depress short-term inflation, it would be effective in maintaining price stability over the medium to long term," he said.
"It would attenuate further rises in asset prices and credit growth and thereby forestall subsequent adverse effects on price stability once a correction takes place."
He also launched a stinging attack on calls to use public money to create an emergency bail out fund which could be used in future crisis.
"We must not add new incentives for moral hazard by creating an "emergency fund" for banks, financed or cofinanced by taxpayers' money," Stark said.
"Now is the time to act; to ensure that financial institutions can never again hold hostage the economic well-being of people who had no part in those institutions' irresponsible business decisions."
He also slammed banks for continuing the risky behaviour that led to the financial crisis.
"As yet, I have, however, not seen any significant change in the behaviour of market participants," Stark complained.
In contrast, he said there were encouraging developments on the institutional side of financial system reform and welcomed signs that the economic freefall was over and that the global recession had bottomed out.
Stark, one of the ECB's six-strong Executive Board, said the bank was preparing to begin the process of reducing its crisis support.
"After extended discussions, we are moving closer to phasing out our liquidity measures, as not all of them will be needed to the same extent as in the past," he said.
ECB President Jean-Claude Trichet signalled earlier this month that the ECB was unlikely to continue lending banks one-year funding next year. (Reporting by Sakari Suoninen; editing by Andy Bruce)