Financial Schools Reviews

() - German central bank President Axel Weber backed extending unlimited lending to banks until the end of this year and said policy makers should discuss about exit in early 2011.

“Most of these discussions about the continuation of the exit I think will be focused on the first quarter,” he said in an interview with Bloomberg Television in Frankfurt Thursday. Weber, 53, a prominent candidate for the ECB presidency, also said, “It’s clear that we need to re-embark on a normalization procedure.”

On the economy Weber said, growth projections for the euro area are likely to be revised up as a result of the strong second quarter performance by Germany. He asserted that the euro-region revisions will be “more modest” than Germany’s because of weaker growth in some peripheral countries. In June, the ECB had forecast 1% growth for euro area this year and 1.2% rise in 2011.

Bundesbank on Thursday raised the 2010 growth outlook for Germany after the economic growth quickened in the second quarter. In its monthly report for August, the central bank forecast 3% growth this year, much more than the 1.9% growth it had predicted in June. It noted that the pace of growth will slow in the reminder of the year, but overall economic fundamentals are strong.

Last week, official figures showed that the German economy economy expanded at a record pace of 2.2% in the second quarter following an upwardly revised 0.5% increase in the first three months of the year. The German government expects the domestic economy to expand 1.4% this year, but an optimistic economy minister Rainer Bruederle foresee 2% expansion.

While saying that there are no signs of inflation in the euro area, he indicated that the ECB will not embark on monetary tightening in the near future. “Since inflation risks continue to be low over the policy- relevant medium term, this does not suggest a policy tightening yet,” he said. “Rates remain appropriate.”

His comments are clearly dovish and negative for the euro, as they indicate no further exit from the ECB before first quarter 2011 at the earliest, Danske Bank economist Lars Rasmussen said.

Sticking to his stance on bond purchase programme, Weber said, “It is pretty clear that the purchase of government bonds has played a minor role only, it was a very modest number.”

“What is happening is the market is re-pricing sovereign debt. I think any intervention in the market can smooth out the transition to that new equilibrium, but the market has to find that new equilibrium,” Weber was quoted as saying.

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