Weber Opposes ECB Rate Below 1%, Highlighting Council Divisions

By Jana Randow

April 15 (Bloomberg) -- European Central Bank council member Axel Weber said he’s against cutting the bank’s benchmark interest rate below 1 percent and would prefer not to buy corporate debt, suggesting policy makers are split over how to haul Europe out of recession.

“I’m critical of reducing the main refinancing rate below 1 percent” as it risks paralyzing the interbank money market, Weber, who heads Germany’s Bundesbank, said in a speech in Hamburg today. Purchases of assets such as commercial paper should not be a priority for the ECB as it considers other tools to revive lending, he said.

The comments put Weber at odds with fellow council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus, who have both indicated they may support cutting the key rate below 1 percent and the purchase of debt securities. Austria’s Ewald Nowotny said last week debt purchases would be “sensible” and the debate on how low to cut the benchmark is still open.

“It seems that council members are divided,” said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. The ECB risks acting too slowly “given the pace of economic contraction and declining inflation rates,” he said.

While ECB President Jean-Claude Trichet has signaled the bank is likely to lower the benchmark rate to 1 percent from 1.25 percent next month, he’s ruled out cutting the deposit rate further from 0.25 percent.

Rate Corridor

Bringing the ECB’s benchmark too close to the deposit rate could reduce the incentive for banks to lend to each other. Instead of trading excess cash at the overnight market rate, currently at 0.9 percent, financial institutions may decide to avoid risk and park it with the central bank instead.

There would be “practically no reward” for banks to lend, Weber said. “Therefore, the risk exists that the private interbank market would become completely paralyzed.”

The Governing Council is also discussing additional non- standard measures to stimulate growth and lending as interest rates reach their lower limit. So far, the ECB has provided banks with unlimited amounts of liquidity in its refinancing operations for periods of up to six months.

Weber indicated he favors offering banks longer-term loans over asset purchases. The ECB’s measures “should take account of the strong role of banks for our continental-European financial system,” he said. “Direct interventions, such as the purchase of corporate debt, shouldn’t take priority.”

The issue of asset purchases “is clearly one which the Governing Council is finding hard to agree upon,” said Julian Callow, chief European economist at Barclays Capital in London. “As an influential voice in the Governing Council’s debate, opposition by Weber to particular actions can represent a significant, if not ultimately insuperable, hurdle.”

To contact the reporter on this story: Jana Randow in Frankfurt jrandow@bloomberg.net.