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

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

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

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

Praet, who has the powerful economics portfolio among his tasks at the ECB, also said that a strong increase in cash was not a sign of inflation in times of crisis.

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

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

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

(Reporting by Eva Kuehnen and Sakari Suoninen)

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Keywords: ECB/PRAET