Markets have understood the European Central Bank's policy signals, ECB policymaker Axel Weber said on Tuesday, adding he did not want to correct expectations for rates to be at 1.75 percent by year's end.

The ECB shocked financial markets last week when the bank's president, Jean-Claude Trichet, said it may raise interest rates next month, wrongfooting economists and traders who had not expected it to raise rates until much later in the year.

I think President Trichet said the right thing: it's possible but not on auto-pilot, Weber told reporters when asked if a rate hike should be expected in April or May.

I think markets have understood this kind of language, which is a bit stylized, in the past very well. And I think they've got it this time.

Trichet said last Thursday the ECB would exercise strong vigilance over rising inflation, deploying a phrase that in the past signaled a rate rise was only a month away.

Weber said price risks were clearly to the upside and there was a genuine risk that inflation will stay higher than is advisable and tolerable for some time. So I think the fact that the ECB signaled strong vigilance is the right answer.

Asked if he was comfortable with market expectations that ECB rates will rise from their current record low of 1 percent to 1.75 percent by year's end, Weber replied: I wouldn't do anything to try to correct market expectations at this point.

I don't want to correct them, he added.

Earlier on Tuesday, fellow ECB policymaker Ewald Nowotny said an ECB interest rate hike should be seen as part of a return toward a more normal policy stance.

RIGHT DECISION

Weber shocked markets himself last month when he backed out of the race to become the next ECB president by announcing he was stepping down as Bundesbank chief at the end of April.

He missed last week's ECB's policy decision due to a meeting with Cologne University, to which he intends to return after a one-year stint at the University of Chicago, but backed Trichet's statement that the ECB would exercise strong vigilance over rising inflation, a phrase that in the past signaled a rate rise was only a month away.

My colleagues took the right decision, he said.

The ECB should prepare an exit from its extraordinary liquidity measures in the coming months, first by moving to competitive tenders in the three-month operations, he said.

It should also review whether its one-month tender is necessary in the future.

The first step with interest rates has been announced, what is still missing and still must come is the Normalization of the refinancing operations, that is to say the full allotment must of course in time -- with the recovery of financial markets -- be reviewed, Weber said.

The ECB was drawing in on a plan to tackle the problem that many banks in debt-strained euro zone countries remain heavily dependent on the ECB for their funding.

We have made good progress, he said. I am pretty sure that by the end of this next quarter we'll be able to deliver some results.

(Additional reporting by Andreas Framke, editing by Mike Peacock)

European central bank