Weber Pushes for ECB Rate Floor as Council Bickers Over Policy

By Jana Randow and Simone Meier

April 16 (Bloomberg) -- European Central Bank council member Axel Weber said the bank should call an end to rate reductions next month, pressuring policy makers to resolve their squabble over a package of new measures to rescue the economy.

“It’s necessary that we announce a refinancing framework that can be relied upon for a certain period of time,” Weber, who heads Germany’s Bundesbank, said in Hamburg yesterday. “That includes the medium-term level for the main refinancing rate,” which shouldn’t be cut below 1 percent, he said.

Weber’s comments suggest he may have won support for his position on rates on the ECB’s 22-member Governing Council, which is divided over not only how low to cut borrowing costs but also whether to purchase debt assets. The bank this month cut its benchmark less than economists had forecast, by a quarter point to 1.25 percent, and delayed a decision on new policy tools until May.

“Weber is an influential member of the Governing Council and wouldn’t go as far if he wasn’t fairly confident about the way the discussion is shaping up,” said Nick Kounis, chief European economist at Fortis in Amsterdam. “It’s more than thinking aloud. I always see his remarks as a very good indication of what happens next.”

Council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have both indicated they may support cutting the key rate below 1 percent and purchasing debt securities to pump money into the economy. 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.

‘Firm Signal’

Weber said he favors extending the maturities of the ECB’s loans to banks to ease credit concerns. So far, the ECB has provided banks with unlimited amounts of liquidity in its refinancing operations for periods of up to six months.

For longer loans to be effective, the ECB may have to signal that the benchmark rate won’t drop any further. That’s because banks would be reluctant to borrow for longer terms if they thought they could get money cheaper in the future.

“If they’re going to extend the tender operations to one year, there has to be a firm signal that it’s as cheap as it’s going to get,” said James Nixon, an economist at Societe Generale SA in London.

Weber said the ECB will unveil a package of measures next month “with a timeframe of at least the rest of this year and into next year.”

‘Completely Paralyzed’

He said bringing the ECB’s benchmark too close to its overnight 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 at 0.25 percent 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.”

“He made it very clear that he wants to get the refinancing rate to 1 percent, declare that it’s as low as they’re going to go and extend the refinancing operations to one year,” said Nixon, who used to work as a forecaster at the ECB. “Other measures very much take a back seat.”

While not ruling out the purchase of corporate debt, Weber said it shouldn’t be a priority for an economy that is primarily bank-financed. That puts him at odds with Nowotny, Orphanides, Provopoulos and ECB Vice President Lucas Papademos, who have all spoken in support of the measure.

Asset purchases would mark a shift for the ECB, which has stood aside as the Federal Reserve, Bank of England and Bank of Japan pump money into their economies by buying government and corporate debt.

The issue “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, Simone Meier in Frankfurt smeier@bloomberg.net.