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The European Central Bank may need to hike its interest rate before inflation starts threatening, the bank's Executive Board member Lorenzo Bini Smaghi said Friday.
"To be sure, the tightening phase cannot wait until inflation materializes, but will have to precede it," Bini Smaghi said in a speech at the Bank of Italy.
However, he noted that the pace of the tightening will obviously depend on the underlying conditions, in particular the speed of the recovery. "Given the uncertainties, it would be inappropriate to commit to any specific path ex ante."
Further, he said it is not the central bank's task to continue providing liquidity to financial institutions which are not able to stand on their own feet, once the turmoil is over.
"It is the responsibility of the supervisory authorities, and ultimately of Treasuries, to address the problems of these addicted banks as soon as possible, through recapitalization and restructuring, as appropriate, and to ensure that all banks in their jurisdictions can stand on their own feet even without the central bank's facilities."
According to the policymaker, having an exit strategy is an act of responsibility for a central bank. But it's critical to have a well thought-out exit strategy because markets have to realize that the current policy is temporary and will be reversed when it is no longer appropriate.
"The more delayed the fiscal exit, the more the monetary policy exit might have to be brought forward," he said.
Elsewhere, another ECB policymaker, Jose Manuel Gonzalez-Paramo, reportedly said the ECB supports the European Commission's recommendation that countries should start withdrawal of fiscal stimulus measures in the first half of 2010.
Speaking in Spain, he said options are open for the ECB to raise interest rate first or to withdraw liquidity support. He noted that the decision will depend on central bank's assessment of the risks to price stability and of the fragility of the banking system.
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