ECB officials fret over money market tensions

By Marc Jones

FRANKFURT (Reuters) - Rising money market interest rates are neither normal nor appropriate, European Central Bank policymaker Christian Noyer said on Friday, in remarks partly echoed by his colleague Axel Weber.

The ECB could not tolerate continued tensions on interbank lending markets, the French central bank chief said, and Weber contrasted them with the gains in European share prices over the past month.

Noyer and Executive Board member Lorenzo Bini Smaghi also highlighted a poor inflation outlook, though their colleague Miguel Angel Fernandez Ordonez was more relaxed and said the ECB's current interest rate policy was still appropriate.

Euribor rates, which act as a benchmark for euro-zone interbank lending costs, have risen to their highest levels since last December <EURIBOR=> as banks suck up extra ECB and U.S. Federal Reserve funding but remain reluctant to lend.

"The present situation is not something we can consider normal or appropriate," Noyer said in an interview with the Wall Street Journal. "In a banking system very much made up of universal banks, funding costs are not at all reflected by this abnormal level of the Euribor."

"These developments are a concern and we have to continue to follow them very closely," he added.

The ECB has repeatedly intervened in the interbank lending market since the U.S. subprime problems spilled over to European markets last summer.

But while the ECB has succeeded in keeping overnight bank lending rates close to its 4 percent policy rate, injections of three-month and even six-month funds have failed to tame longer term lending rates.