THE EUROPEAN Central Bank will hold back after showering the banking system with cheap money and is now looking at ways to retreat from crisis mode when the time is right, according to ECB governing council member Ewald Nowotny.

He added, however, that it was still too early to remove central bank support – a gradual process that depended on stable prices and financial markets.

Late last year, the ECB cut its interest rates back to a record low of 1 per cent and has since fed banks more than €1 trillion in cheap three-year funds, while also loosening its collateral rules.

While this has averted a financial meltdown, there is growing unease among governing council members about the risks involved.

One member, Erkki Liikanen, stressed in separate comments yesterday the need for a timely exit from the ECB’s crisis mode.

For now, the ECB was in a wait-and-see mode, Mr Nowotny said.

“Just now we have to see how the various measures affect the economy,” he said.

“This will take some time; in the meantime, I do not see any need for further action.”

He added that further interest rate cuts were not being discussed.

Mr Nowotny mapped out conditions under which the ECB could remove its extraordinary support measures.

“For the ECB the main compass always is to maintain price stability,” he said.

“The second point is of course to have an efficient functioning of capital and money markets, and in this context these are the orientation lines along which we go.”

The governing council was already discussing how to organise an exit, Mr Nowotny said, but he stressed the move had to be done in a way that would not disrupt the economy.

“There is an arsenal of potential measures and what to use has to be decided when the time comes . . . This is not something that can be concentrated at one single point of time but this is a gradual approach,” Mr Nowotny said.

Mr Liikanen, the Bank of Finland governor, said that before one could declare the debt crisis over, the ECB needed to quit its extraordinary measures and have the economy stand on its own.

“Central bank measures can be used to calm the financial markets, but a permanent solution to the debt crisis will require both successful fiscal and structural policies and a controlled and timely exit from the temporary central bank measures,” Mr Liikanen said. – (Reuters)