WRAPUP 1-ECB urges banks to prepare for slow, steady exit

* Orphanides: dropping all extra liquidity steps would depend on inflation threat

* Central banks urge restraint on 12-month borrowing

* Policymakers see better growth ahead

By Sakari Suoninen and Boris Groendahl

NICOSIA/VIENNA, Nov 16 (Reuters) - The European Central Bank will not drop all of its extra liquidity support until it becomes concerned about risks on inflation, Governing Council member Athanasios Orphanides told Reuters.

In an interview with Reuters, Orphanides said inflation expectations over the ECB's policy horizon were on the low side and the ECB's current "very accommodative" stance with record low interest rates and generous liquidity was appropriate.

At the same time, central banks urged financial institutions to be reasonable in bidding for funds at the ECB's next 12-month lending operation in December, which will probably be its last given ECB President Jean-Claude Trichet has already signalled these are unlikely to be renewed next year.

Orphanides said the gradual phasing out of measures which were no longer needed by banks was not equivalent to a tightening in monetary policy, but dropping all its extra steps would be.

"Discontinuation of all of our non-standard measures would represent a tightening of monetary conditions. So if we think about it in these terms, the associated decisions would have to be covered rather by considerations similar to those determining a conventional policy tightening," he said, pointing to the outlook for inflation. [ID:nLAG005920]

His comments, which helped to send the euro down against the U.S. dollar EUR=, signal no rush for euro zone central banks to mop up the flood of liquidity which has pushed market interest rates to record lows in the last year. EURIBOR= They contrast with warnings by Germany's Axel Weber that policymakers cannot afford to miss the right time to exit from monetary, fiscal and financial support or risk renewed market turbulences. [ID:nLAG005918]

Others urged banks to be prudent at the Dec. 16 12-month operation given that a massive take-up of funds will make it more difficult to rebalance liquidity and wean banks off cheap credit. Greece's central bank said on Monday it had advised some Greek banks to show restraint in December. [ID:nATH004765]

Austria's Ewald Nowotny said central banks were relying on their private-sector counterparts to show sense.

"We assume that banks will know themselves what is reasonable (when they bid for the 12-month money)," Nowotny told reporters on the sidelines of a conference in Vienna.

Banks borrowed 442 billion euros in the first 12-month operation in June, which must be repaid on July 1 -- leaving a big hole in liquidity supplies.

GROWTH SEEN BETTER

Economists polled by Reuters expect the ECB to reel in the extra liquidity steps before raising interest rates, a step which is not expected until the third quarter of 2010.

Spanish central bank governor Miguel Angel Fernandez Ordonez told the Financial Times: "It is clear that any increase in rates is off the screen. The markets do not expect any change before the second half of next year."

Still, the 16-nation region grew 0.4 percent in the third quarter, and several policymakers said ECB staff would probably revise up their growth forecasts at the December meeting, when a decision is also due on how to start easing away from liquidity support.

"There is some news now that there will be a better forecast for this year and next year but this is all I can say," Ivan Sramko, governor of Slovakia's central bank, said on the sidelines of the Austrian central bank conference.

Nowotny noted that third quarter economic growth data had been better than expected in the euro zone and the fourth quarter would probably be better too. This would likely show in the ECB's next economic forecast.

Finland's Erkki Liikanen questioned the stamina of the current economic recovery, warning that growth hopes could be scuppered by rising unemployment.

"To what extent the emerging growth momentum is self-sustaining remains an open question. Rising unemployment rates cast a long shadow over the growth prospects," Liikanen said said in a speech in Helsinki. (Writing by Krista Hughes, additional reporting by Marc Jones in Frankfurt, Eva Lamppu in Helsinki, Nelson Graves and Masayuki Kitano in Tokyo, Sylvia Westall in Vienna)