Battle rages in echelon of EU monetary policy

Bloomberg

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European Central Bank policymakers clashed over the bank’s asset-buying program less than a week after President Jean-Claude Trichet engineered a truce.Slovenia’s Marko Kranjec said Wednesday the ECB is "likely" to spend more than the 60 billion euros ($82 billion) it has earmarked for covered-bond purchases and hasn’t ruled out acquiring corporate bonds and commercial paper.

Hours later Germany’s Axel Weber, who had already said there is "no need" to buy any other assets, insisted 60 billion euros is the "maximum."The diverging views suggest the ECB is still split over the best way to tackle Europe’s worst recession since World War II, even after Trichet said the decisions taken last week by the 22-member Governing Council were "unanimous."

Weber has always opposed asset purchases and warned Wednesday against stimulating the economy too much. Other policymakers have argued the bank may need to do more to counter the risk of deflation."The ECB governing council looks like a battlefield," said Laurent Bilke, an economist at Nomura International in London. "It would be simply ridiculous if we weren’t already in the middle of the worst recession in postwar history. But now it has more dramatic consequences.

Trichet will have to restore some order."Trichet on May 7 cut the benchmark interest rate to a record-low 1 percent and said that’s not necessarily its lowest level. He also announced the ECB will buy 60 billion euros of covered bonds, securities backed by mortgages and public-sector loans which have suffered a slump in demand during the financial crisis.

Details of the plan are to be unveiled next month. "The 60 billion euros they announced is peanuts for an economy the size of the euro zone," economics professor and former Bank of England policy maker Willem Buiter said at a conference in Dublin Wednesday. "I expect they will announce more or that the recession in the euro zone will be longer and deeper than would otherwise be necessary."By contrast, the Federal Reserve, Bank of England and Bank of Japan have lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies to prevent the development of a deflationary spiral.

Trichet was forced to compromise on the ECB’s asset-purchase program in order to get Weber on board. Weber argues Europe isn’t at risk of deflation and the ECB should avoid taking additional risk onto its balance sheet. He also wants the ECB to signal an end to rate cuts. Other council members say the ECB can do more. Kranjec, who heads the Bank of Slovenia, said in an interview in Ljubljana Wednesday that the ECB can lower rates further if needed and 60 billion euros is "not the final amount" for the asset-purchase program. The bank has not ruled out buying corporate bonds or commercial paper, he said.

Austria’s Ewald Nowotny, who supported the push for asset purchases on the ECB’s council, today stressed that central banks can buy government and corporate debt when rates near zero.

He didn’t comment specifically on the ECB’s intentions. Still, Marc Chandler, head of global currency strategy at Brown Brothers Harriman in New York, said that as president of Germany’s Bundesbank Weber has considerable influence.His comments "probably reflect the attitude of most of the other participants," he said. "Who’s going to agree with the guy from Slovenia against Weber?"Weber said in a speech in London Wednesday night that inflation may make a "rapid and powerful comeback" if the economy recovers faster than expected and policy makers don’t tighten policy as quickly as it was loosened.The ECB’s non-standard policies, which concentrate on improving funding conditions for banks, reflect "the specific circumstances of the euro area - and will continue to do so," he said.

Asked to respond to Kranjec and Buiter, Weber replied: "In five years of central banking you learn two things: Never comment on colleagues and never comment on academics."