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European Central Bank Governing Council member Athanasios Orphanides said the bank will continue to support the economy even as it unwinds its emergency lending measures, suggesting interest rates may remain at a record low for some time.

“The phasing out of some unconventional measures should not be misinterpreted as a desire to remove policy accommodation from the economy,” Orphanides, who heads the central bank of Cyprus, said in an interview in Nicosia on Feb. 12. “Policy accommodation continues to be needed in light of the very subdued inflation outlook and the unevenness and weakness of the economy.”

The Frankfurt-based ECB has started to withdraw the measures it used to fight the financial crisis and economists last month predicted it would raise the benchmark rate from 1 percent in the fourth quarter. Still, the euro-area economy barely expanded in the final quarter of last year and the fiscal crisis gripping the region may weigh on growth and inflation as governments cut spending to reduce budget deficits.

Orphanides’ comments “confirm our call that the ECB will not raise rates this year,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “He sounds very concerned about the outlook for both growth and inflation.”

The euro eased to $1.3613 after the interview was published from $1.3622.

‘Subdued’ Inflation

Orphanides, a former U.S. Federal Reserve economist, said the “evolution of the economy and the associated risks to price stability are the key” to the rate outlook.

“If events over the next several months are consistent with inflation remaining subdued and considerably below our price-stability objective, that would indicate that the accommodative policy should remain in place,” he said.

The ECB in December predicted growth of 0.8 percent this year and 1.2 percent in 2011. Inflation was projected to average 1.3 percent this year and 1.4 percent next year. The ECB aims to keep the rate just below 2 percent.

Orphanides said preventing inflation from dropping too far below the ECB’s goal is as important as keeping a lid on price increases.

‘Symmetrical’ Policy

“The most important element is to be symmetrical in the pursuit of our price-stability objective,” he said. “I am concerned that if HICP inflation stays significantly below our definition of price stability for an extended period, this deviation could become embedded in longer term inflation expectations business cards. This would be an unwelcome development.”

In its latest quarterly survey of professional forecasters published on Feb. 11, the ECB said five-year inflation expectations stayed at 1.9 percent. However, forecasters lowered their 2011 inflation prediction to 1.5 percent from 1.6 percent.

Orphanides said he would be “more comfortable” if 2011 expectations “moved closer to our definition of price stability rather than a little bit away from it.” The current inflation rate of 1 percent also “confirms the appropriateness of continuing with an accommodative monetary-policy stance,” he said.

The 16-nation economy grew just 0.1 percent in the fourth quarter from the third, the European Union’s statistics office said Feb. 12. Economists had forecast 0.3 percent growth.

Weaker Growth

Growth “was a little bit weaker than the baseline scenario,” said Orphanides. “We are monitoring the improvements in the economy overall, but at the same time we also note the weakness in the money figures as well as the weakness in credit growth. Those are in my view consistent with the recovery not being very strong at the moment.”

The ECB’s 22-member Governing Council will decide at its next policy meeting on March 4 whether to further scale back its emergency lending measures. It has already announced the end of its 12 and 6-month loans to banks and indicated it may return to an auction procedure in some of its refinancing operations as a next step.

“The longer our interventions remain in effect, the more dangerous the side effects become,” ECB Executive Board member Juergen Stark told Germany’s Spiegel magazine in an interview published today.

Orphanides indicated he favors leaving full allotment in the main weekly refinancing operation in place for the time being.

“In the circumstances we are in at present, with very low short-term nominal interest rates, it’s very hard to assess precisely what the demand for liquidity in the banking sector is,” he said. “For that reason it is entirely sensible to have a procedure that can flexibly meet variations in the demand for liquidity, and that is what our fixed-rate, full-allotment policy is doing.”

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