(adds background, Bini Smaghi comments)
ROME, June 24 (Reuters) - Current high levels of monetary liquidity must be rapidly reduced to avoid new speculative bubbles, European Central Bank Executive Board member Lorenzo Bini Smaghi said on Wednesday.
"This enormous expansion of monetary liquidity created to tackle this crisis must clearly be eliminated quickly to avoid the same phenomena we have seen before and (avoid) fuelling a speculative bubble," Bini Smaghi said at a book presentation.
He also said that lowering interest rates to stable levels can be more effective than cutting them quickly to zero.
"A policy that quickly brings rates down to zero but cannot generate expectations of stable rates at those levels, can end up being less effective than a policy which maintains rates slightly higher but has stable expectations, allowing a flatter yield curve to be maintained," he said.
The ECB has been relaxing monetary policy since October last year and most analysts expect the current key financing rate of 1 percent will prove to be the bottom of the easing cycle. On Wednesday the ECB poured 442 billion euros ($613 billion) of one-year funds into money markets, its biggest fund injection ever.
"This crisis affirms the need for fully independent central banks in which the appointment of Executive Board members is not linked to electoral cycles, and where such members have long term mandates," Bini Smaghi said.
"It also confirms how important it is for price stability to be the primary objective of monetary policy."
Having more objectives beside price stability does not make it easier for central banks either to prevent crises or resolve them, he said.
Central banks should also aim to contribute to financial stability, "but they should also have the instruments at their disposal to achieve this", Bini Smaghi said.
(Reporting by Stefano Bernabei, writing by Gavin Jones)