* ECB ramping up concern about liquidity addiction
* Analysts see fears bolstering liquidity exit
* Central bankers say rates not tool to tackle bubbles
By Marc Jones
FRANKFURT, Nov 26 (Reuters) - Growing fears about the unwanted side-effects of the European Central Bank's crisis-fighting liquidity lifeline are firming policymakers' resolve to pull back on support sooner rather than later.
ECB President Jean-Claude Trichet has warned against bank "addiction" to liquidity support and Governing Council member Axel Weber said on Thursday it was time to look at the "design of exit strategies from the monetary and fiscal stimulus".
Concern about fuelling a new round of asset bubbles also comes into the mix although analysts see little chance of the ECB formally changing its mandate to include asset prices as well as consumer prices, or tackling asset prices with rate hikes.
Executive Board member Lorenzo Bini Smaghi said earlier this month if the abundant liquidity supplied by the ECB did not find its way through to the real economy, it could lead to asset prices overheating.
Data on Thursday showed loans to euro zone households and firms fell further in October, despite the ECB lending banks billions of euros of funds since the start of the financial crisis, suggesting much of the cash has been used to rebuild bank balance sheets or been invested in soaring markets.
"Low interest rates are pushing some operators to speculative moves that are not sustainable and may bring the implosion of mini bubbles," Bini Smaghi said. [ID:nL8147361]
The concern about the impact of more than a year of cheap and unlimited funds and the ability of euro zone economies and banks to be weaned off it, is seeping through into the ECB's actions, even though analysts do not see a rise from record low 1 percent interest rates any time soon.
The euro zone's central bank has already taken the first steps towards unwinding its policy of offering unlimited funds at fixed interest rates by signalling it is unlikely to keep up one-year loans next year, and tightening the rules for accepting asset-backed securities as collateral. [ID:nLAG005930]
Some national central banks in the bloc have also warned their commercial counterparts to show restraint in taking up the ECB's next offer of unlimited 12-month funds -- most notably in Greece, where rising rates on government debt suggest investors worry about its ability to withstand the exit. [ID:nLG450007]
Although Reuters polls show the U.S. Federal Reserve, the Bank of England and the ECB all starting to hike rates in the second half of next year, the ECB's exit is likely to start before then as it phases out the liquidity support which it has pursued more strongly than counterparts. [ECILT/WRAP]
Market prices show overnight cash matching the ECB's policy
rate of 1 percent by August -- an effective tightening of 65
basis points from today's levels as liquidity ebbs.
"I think they are probably going to be the first to blink on the liquidity front and the exit front," Schneider Foreign Exchange head of market analysis Stephen Gallo said, noting a gap between the ECB and other G7 central banks.
"Clearly there's a divergence growing and one of the reasons ... is an awareness on the part of the ECB that this liquidity is going to have nasty repercussions over the medium term if they don't try to rein it in gradually over the course of 2010.
"That doesn't mean to hike to 2 percent by March, but it means to have an eye towards exiting rather than keeping policy ultra-loose for an ultra-long time."
Crunch decisions are due at the Dec. 3 policy meeting: many of the emergency measures the ECB has put in place to combat financial crisis, such as uncapped, fixed-rate lending expire in January, meaning it must either renew them, replace them or scrap them. (For factbox, see [ID:nLR138405]))
BUBBLE WATCH
In a speech in London, Bini Smaghi listed factors which
could illustrate over-optimism on markets, from stock prices to
yields on one-year government bonds.
Other ECB policymakers including Weber, Christian Noyer and Juergen Stark have also said central banks cannot ignore wild jumps in asset prices, although Weber believes interest rates are not the right tool to tackle bubbles. [ID:nLK438276]
For graphic on asset prices, please see: http://graphics.thomsonreuters.com/119/GLB_RTNSA1109.gif
Deutsche Bank economist Mark Wall said policymakers' increased concern about asset prices would confirm their existing intention to ease back on the liquidity accelerator.
"It's a consideration in their mind when they are thinking about the withdrawal of supplementary liquidity, but we are still months away from a situation where conditions necessitate a tightening of the refi rate," he said.
There has been a 70 percent bounce in global stock prices since March <.MIWD00000PUS>. European shares <.FTEU3> have risen more than 50 percent in a near vertical trajectory, although stock markets are still 30-40 percent below their pre-crisis peaks in 2007.
Oil prices are also back at $76 a barrel
"The ECB will be considering how much their policies are contributing to asset price bubbles and indeed whether we are going through a microcosm of the 2003-2007 bubble," said David Page, an economist at Investec.
But Societe Generale economist Klaus Baader said it was difficult to see what a central bank could do about bubbles which were not accompanied by strong money and credit growth -- something noticeably absent in Thursday's official figures.
"To try to tackle asset prices directly with monetary policy ... is a dangerous business because the collateral damage to the economy is so large," he said.
To read Bini Smaghi speech, click on:
http://www.ecb.int/press/key/date/2009/html/sp091119.en.html
(Additional reporting by Krista Hughes, editing by Mike
Peacock)
((marc.jones@thomsonreuters.com; +49 (0)69 7565 1219; reuters
messaging: marc.jones.reuters.com@reuters.net))
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