Stark says ECB shouldn't delay rate rises - paper

FRANKFURT, March 29 Tue Mar 29, 2011 12:03pm EDT

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FRANKFURT, March 29 (Reuters) - The European Central Bank should not delay raising interest rates from their current "very accommodative" level, Executive Board member Juergen Stark was quoted as saying on Tuesday.

The policymaker also said the ECB would look at euro zone liquidity needs after the Irish banking stress tests are published later this week.

"It is time to go in the direction of normality, step by step," Stark told daily Frankfurter Allgemeine Zeitung, when asked about interest rates.

"We cannot keep the rate at this level for a long time, especially not in connection with extraordinary credit help."

The interview will be published in Wednesday's edition of the newspaper, but was made available to news agencies on Tuesday.

Stark, who heads the ECB's influential economics unit, also warned of gathering inflation worries, saying there were clear signs that higher import prices were going through the production process, and that could push consumer price inflation higher.

But he also said the ECB did not want to choke the recovery.

"For us at the moment it is not about applying brakes to economic recovery," Stark said.

"It is much more about avoiding the negative side effects of monetary policy, which has become very accommodative."

Despite the disasters in Japan and the surge in tensions in parts of the Middle East, recent ECB policymaker comments have cemented expectations that the bank will raise rates, which have been frozen at a record low 1 percent since May 2009, when it meets on April 7.

ECB Governing Council member Jozef Makuch said on Tuesday the central bank is "highly likely" to raise its main interest rate next month. [ID:nLDE72S1P7]

Stark, one of the ECB's six-strong board, said that uncertainty had increased due to the events in Japan, but added that its impact was likely to remain limited for the euro zone.

"Our complete assessment has not changed," he said.

Stark also said that the nuclear disaster in Japan and turmoil in the Middle East could lead to rising global energy prices, and them then remaining at a high level.

"Now is the end phase of Irish bank stress tests. Then we'll see the capital requirement," Stark said. "And that will show the consequences for liquidity provision via the Eurosystem and via the ELA (emergency liquidity assistance) of the Irish central bank."

A source told Reuters last week the ECB is putting the finishing touches on a new facility that will give troubled euro zone banks liquidity over a longer time frame, throwing a lifeline to Ireland's ailing banks.

The plan will initially be "tailor made for Irish banks" and was likely to be announced this week to dovetail with the results of fresh stress tests on the country's lenders, the source said. [ID:nLDE72R087]

Stark also said he saw clear signs of improvement in money markets while accepting that some banks remain dependent on ECB funds.

"Weak banks' dependency on our refinancing operations cannot be a permanent state," Stark said.

Stark also warned against bond holder haircuts, saying they could destabilise the financial system: "The ECB fears that in Europe and in other parts of the world, this could lead to a new wave of insecurity." (Reporting by Sakari Suoninen and Marc Jones; Editing by Ruth Pitchford)

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