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FRANKFURT, Dec 11 (Reuters) - The European Central Bank should be wary about cutting interest rates too low, Germany's Governing Council member Axel Weber was reported as saying on Thursday.
"We should be careful when our interest rates enter into territory never explored before. Our lowest level so far was 2 percent," Germany's Boersen-Zeitung quoted him as saying in a pre released extract of an interview.
Euro zone interest rates are currently at 2.5 percent and analysts are expecting the financial crisis and evolving economic slump to force them down to record lows in the coming months.
Weber said if medium and long-term inflationary expectations are nearly below 2 percent and the nominal interest rates were to be below 2 percent for a longer period, that would imply real interests would be negative.
"I would like to avoid that. We can and should use the short-term room for manoeuvre in the monetary policy. But after the economic environment has returned to normal, interest rates must swiftly find themselves back to normal levels," he said.
The ECB cut rates by a record 75 basis points last week bringing the benchmark rate to 2.5 percent.
Weber comments dovetail with ECB board member Juergen Stark on Wednesday who said that with rates now at 2.5 percent, the ECB did not have much more room to cut them further and that any cuts from here on in would have to be small.
Weber said that after the ECB rate cuts last week, "we have further room for manoeuvre in the monetary policy".
"But I will not say the time and the size of the next steps," he added.
He said he does not believe that in January the ECB would already have "many new relevant information, which will lead to a re-assessment of the existing room for manoeuvre in monetary policy."
Despite the measures to support the money markets, he said there will be the usual tensions in the interbank markets by the end of the year. These should ease early in 2009, he added.
"But I expect that in the new year a relaxation will occur and we will see a decline in the interest rate premiums.
"We should wait for this in order to see how the refinancing conditions of the banks develop and what the impact so far of the easing of the monetary policy," he said.
Weber said that although growth in 2010 will be higher than in 2009, it does not mean that would be a good year, adding downside risks still exist.
"We could not rule out that the economic burdens would continue longer and deeper than what we have so far forecast," he added.
Weber said the scenario of a disinflation is very unlikely to happen and he does not expect a deflation in Germany. (Reporting by Marc Jones and Marilyn Gerlach)