By Shadia Nasralla
LINZ, Austria (Reuters) - The European Central Bank could reduce asset purchases from the start of next year but should not completely stop bond buys, Austrian central bank governor Ewald Nowotny said on Wednesday, adding that policymakers needs a flexible, careful plan.
With economic growth picking up strength and the threat of deflation gone, the ECB has room to claw back stimulus but only moderately since inflation remains far below its target of close to 2 percent and wage growth is still muted, Nowotny, who sits on the ECB's rate setting Governing Council, told a conference.
The ECB's 2.3 trillion euro asset buys are set to run until the end of the year and policymakers must decide this autumn, possibly in October, whether to continue the scheme or start winding it down, a potential milestone for a bloc that looks to have finally emerged from nearly a decade of economic malaise.
"When I say that it is reasonable to ease up on the accelerator, I mean -- and I think the Bundesbank has the same point of view -- that we can slightly reduce the volume of asset buys," Nowotny added.
"It means you don't step hard on the brake, so I do not assume that [quantitative easing] will end at the end of the year without replacement," Nowotny added.
With ECB President Mario Draghi opening the door to policy tightening last month, most investors expect the ECB to reduce stimulus, acknowledging that better growth is providing natural support to the economy.
Still, having been burned by a mini tantrum in financial markets last month after Draghi's speech, the bank is likely to move only gradually, emphasizing the need for patience and persistence to lift a still stubbornly low inflation rate.
Nowotny said the ECB will have to act "very carefully" and needs to have a flexible plan, adding that it was much too early to say what the actual decision will be.
He cited the example of the U.S. Federal Reserve, which phased out asset buys over 10 months but never publicly communicated a timeline, stressing flexibility in policy.
He added that he expected underlying inflation, or prices excluding volatile food and fuel prices to rise, and also expects better-than-expected employment data to feed into wages over the medium term, also lifting inflation.
Nowotny added that negative interest rates were necessary for "a while" but warned that negative rates could distort markets, a potentially dangerous phenomenon.