Nowotny Says Taking Rate Below 1% Open for Discussion

By Jana Randow and Christian Vits

April 9 (Bloomberg) -- European Central Bank council member Ewald Nowotny said cutting the benchmark rate below 1 percent is still open for debate and it would be “sensible” for the bank to buy corporate debt.

“It’s my personal opinion that the benchmark rate should not go below 1 percent, but this is a point that’s open for discussion,” Nowotny, who heads Austria’s central bank, said in a telephone interview from Vienna late yesterday. The purchase of commercial paper and corporate bonds is “a sensible and efficient measure,” Nowotny said, adding it may not be introduced immediately because it would take time to prepare.

The comments suggest the ECB council is split over the best way forward amid signs the euro-region economy is slipping deeper into recession. While Germany’s Axel Weber has signaled he’s opposed to buying corporate debt and doesn’t want to take the benchmark rate below 1 percent, Greece’s George Provopoulos this week indicated both remain options.

The euro dropped more than half a cent to $1.3268 after Nowonty’s comments were published. The ECB’s key rate is currently at 1.25 percent.

“All the Governing Council so far appears to have agreed upon is that there could be a 25 basis point cut in May,” said Julian Callow, chief European economist at Barclays Capital in London. “They have clearly not yet determined whether that would then mark the low for the refinancing rate or not.”

New Measures

The ECB this month cut the rate by a quarter point, less than economists forecast, and delayed a decision on new tools until May. The Federal Reserve, Bank of England and Bank of Japan are already pumping money into their economies by buying government and corporate debt.

The Bank of England today left its benchmark interest rate at 0.5 percent and said it will keep buying government bonds to fight the deepest recession in a generation.

“If you’re aiming at intensifying credit supply, measures which focus directly on credit supply are of interest,” Nowotny said. “For example the purchase of commercial paper, corporate bonds and similar things.”

Still, he said this would “take longer to prepare” than offering banks longer-term loans to ease credit tensions. The ECB currently lends banks as much as they want at the prevailing benchmark rate for up to six months.

‘Need for Speed’

Lengthening maturities is “the best option” as far as speed of implementation is concerned, Nowonty said. “That means going beyond the current six months to an extension of, for example, 12 months. That’s something that can be implemented immediately and takes effect promptly.”

The comments are “helpfully transparent on the evolution of unconventional policy measures,” said Ken Wattret, an economist at BNP Paribas in London. “In short, if there’s a need for speed, then repo maturity extensions are the best option.”

Longer loans pose some complications. Banks may not take up the offer unless the ECB signals rate cuts are at an end, and securing cheap money for a year may distort efforts to raise borrowing costs once an economic recovery sets in.

“I would happily accept this problem if indeed the economic recovery comes faster than expected,” Nowotny said. “I think our task is currently to fight the worst economic slump in the post-War period with all available tools. If an improvement becomes apparent, I’d be happy about it.”

Legitimate Pessimism

The Organization for Economic Cooperation and Development predicts the euro-region economy will shrink 4.1 percent this year. By comparison, the ECB on March 5 projected a 2.7 percent contraction.

While Nowotny said the OECD’s forecast is a “pessimistic assessment,” he added: “Regrettably, I’m aware that pessimism in the past was often legitimate.”

He expects inflation to remain below the ECB’s 2 percent limit “over the medium term,” giving the bank room to keep interest rates at historically low levels for some time.

“In a situation like the current one” an expansionary monetary policy “is absolutely necessary,” Nowotny said. “If the recovery is very weak we have to continue to follow an expansive path with both monetary and fiscal policy.”

Weber said March 10 that 1 percent would be his “bottom line” for the ECB’s benchmark rate, while Provopoulos in an April 6 interview said he doesn’t consider 1 percent to be “a threshold.” The Greek Central Bank later issued a statement saying the remark was “inaccurate” and that Provopoulos’s view was the benchmark “could go down from the present level, although in a very measured way.”

When asked about the debate on the council, Nowotny said: “You can’t say we’re divided, rather it’s a discussion we will have. In the past, the decisions in the Governing Council were always consensual. I don’t expect that this will change in the future.”

To contact the reporters on this story: Jana Randow in Frankfurt jrandow@bloomberg.net; Christian Vits in Frankfurt cvits@bloomberg.net