Normalization of ECB policy should start now: Nowotny

LONDON (Reuters) - The European Central Bank should start normalizing its monetary policy, one of its most experienced members, Ewald Nowotny, said on Tuesday.

The ECB is expected to lay out in the next couple of months how it will wind down the 2.5 trillion euro ($3.08 trillion)stimulus program it has been using to help the euro zone's economy over the last three years.

"Now I think it is time for a gradual normalization of monetary policy," Nowotny, who heads Austria's central bank, said during a speech at a SUERF economics conference.

"This normalization requires a delicate balancing of measures as well as careful sequencing in time," he added, saying there were risks to both being too aggressive with the process or starting it too late.

The "exceptional scale" of monetary policy provision over the past years makes the tightening process even more complex than usual, Nowotny also said.

"The euro area economy today clearly is in the middle of a strong and broad-based cyclical upswing."

He was wary however of the current trade strains between the United States and China spilling over. "Trade wars have negative effects for all involved," Nowotny said.

"The direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains...It might have negative effects on financial stability, but effects on monetary policy are not very clear."

Nowotny further said that the ECB did not have an exchange rate target and that he did not want the central bank to make any changes to its goal of keeping inflation just under 2 percent over the medium term.

The "new normal" after this historical winding down of quantitative easing, he said, will also likely be characterized by longer time lags in the transmission of monetary policy to inflation.

(Reporting by Marc Jones and Helen Reid; Editing by Mark Heinrich)

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