ECB's Praet: Must remove liquidity quickly when normality returns

FRANKFURT, Oct 10 (Reuters) - When money starts torecirculate in the economy again, central banks have to removeextra liquidity sloshing in the financial system quickly,European Central Bank Executive Board member Peter Praet said onWednesday.

"When inside money will resume its traditional role inliquidity provision, when the multiplier will start increasing,central bank will have to be quick in re-absorbing the excessoutside currency created in the crisis times," Praet said in acash payment symposium, organised by the German Bundesbank.

After the collapse of investment bank Lehman Brothers, theECB started giving banks unlimited amounts of cash in itsliquidity tenders, a policy it has continued to this day.

Praet, who has the powerful economics portfolio among histasks at the ECB, also said that a strong increase in cash wasnot a sign of inflation in times of crisis.

"When it is used as a store of value and a security bufferfor weak financial institutions, money becomes temporarilydisconnected from spending decisions," he said.

"Under these conditions, a large stock of base money is asign of deflationary risks rather than a harbinger of futureinflation, as was observed in the 1930's."

Central banks have to accommodate the increased demand formoney under those conditions, he added.

(Reporting by Eva Kuehnen and Sakari Suoninen)

((sakari.suoninen@thomsonreuters.com)(+49 69 7565 1267)(ReutersMessaging: sakari.suoninen.thomsonreuters.com@reuters.net))

Keywords: ECB/PRAET