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ECB's Nowotny says don't expect rate rise for some time

The early morning sun glints off the facade of the new headquarters of the European Central Bank (ECB) which is under construction in Frankf
The early morning sun glints off the facade of the new headquarters of the European Central Bank (ECB) which is under construction in Frankf

ALPBACH, Austria (Reuters) - Financial markets should not expect the European Central Bank to raise interest rates for the foreseeable future as long as expectations for inflation remain steady, ECB policymaker Ewald Nowotny said.

He also told reporters that turmoil on emerging markets was not having a direct impact on the euro zone so far, but that it was premature to say this would remain the case.

"The forward guidance of the ECB is a clear statement that means that monetary policy will be conducted so that interest rates will remain at the current rate or lower. The translation is that for the foreseeable future interest rate rises are ruled out," he said late on Thursday in remarks for release on Friday.

"....Some (ECB policymakers) ... interpret this differently, but this from my side - and I believe what has been approved by the ECB president - is the applicable interpretation," he added.

"The central issue is the stability of inflation expectations. As long as these expectations are stable, the forward guidance signals to markets that they do not have to expect a rate rise."

The next ECB policy meeting is next Thursday. A Reuters survey of 60 economists showed the central bank is expected to keep both its main refinancing and deposit rates - now at 0.5 percent and zero respectively - on hold until at least 2015.

The ECB's 23 Governing Council members will meet against a backdrop of improving economic data in the euro zone, though the gradual recovery is uneven and led by Germany, where business sentiment hit its highest level in 16 months in August.

Nowotny said turmoil in emerging markets was not having an impact so far on the euro zone economy.

"It has had more the effect that for example financing conditions have improved for European states, particularly the rather weaker states. For the medium term this (fallout) is possible but it is too early to say," he noted.

Developing markets have borne the brunt of investor unease over a possible U.S.-led military strike on Syria as well as expectations the U.S. Federal Reserve will soon scale back its economic stimulus.

Nowotny said the issue of the Fed tapering its bond-buying program, possibly as early as next month, was primarily a psychological one.

"The Fed at the moment is buying $85 billion a month in either government or mortgage securities and the whole discussion is really about whether I buy maybe $50 billion instead of $85 billion," he said.

Nowotny's spokesman said the remarks referred to a general discussion among central bankers at last week's Jackson Hole conference and not to specific comments by Fed officials.

Unlike the Fed, the ECB moved to shore up confidence by providing cheap three-year loans to banks.

When these loans mature or banks repay them early, it acts as a kind of "quasi-automatic" way to exit extraordinary provisions of liquidity to help weather the financial crisis, Nowotny said.

(Reporting by Michael Shields; Editing by John Stonestreet)

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