ECB's Nowotny warns of emerging asset bubbles -FTD

VIENNA Tue Jan 26, 2010 12:00am EST

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VIENNA Jan 26 (Reuters) - Capital flows into some emerging markets have created a "concrete risk" of asset bubbles there and in some commodities markets, European Central Bank Governing Council member Ewald Nowotny was quoted as saying on Tuesday.

"There are indeed concrete risks of asset bubbles in many emerging countries, caused in particular by significant inflows of short-term capital," Nowotny said in an interview with German newspaper Financial Times Deutschland.

He pointed to similar risks on some commodities markets, "where rising demand from Asia, but also speculation, has created the risk that bubbles are building up."

European stockmarkets, which soared last year after reaching multi-year lows in March, are not in bubble stage since they only recouped losses suffered in 2008 and early 2009, Nowotny told the newspaper.

Nowotny said the main way to address those potential bubbles was regulation.

He named banks' proprietary trading -- a key target of the Obama administration's reform proposals for banking supervision -- as one possible driver of bubbles. He recommended higher capital requirements to curb it.

Nowotny reiterated that the ECB would drain liquidity injected last year in a cautious manner: "We are proceeding very carefully, to avoid new turbulence. Our goal is clear, we want to avoid shortages," he said.

He reiterated he currently saw neither inflation nor deflation risks for the eurozone.

Asked by the newspaper about market expectations the ECB would wait to tighten monetary policy until the U.S. Federal Reserve started raising rates, Nowotny said he would not recommend taking this order for granted.

"There is certainly no law that says the ECB won't act before the Fed does," he said. (Writing by Boris Groendahl; Editing by Andrew Hay)

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