By Matthias Wabl
June 3 (Bloomberg) -- European Central Bank council member Ewald Nowotny wrote last week that the bank can expand its asset-purchase program to buy commercial paper or bonds, a letter obtained by Bloomberg News shows.
While interest rates are now at a historic low, “in the future monetary policy also has the ability to provide support through unconventional methods,” Nowotny, who heads Austria’s central bank, wrote to the Austrian Hotel Association on May 29. “Through the purchase of bonds or other commercial papers, the yield curve can be flattened, thereby lowering long-term interest rates, which are decisive for investment.”
The Austrian central bank confirmed Nowotny sent the letter and said the comments “should be understood in an academic context.” They nevertheless suggest the ECB has not closed the door on expanding its asset purchases beyond the 60 billion euros ($86 billion) of covered bonds it has already announced.
The 22-member Governing Council, which meets tomorrow, is split on the issue. Germany’s Axel Weber, who opposed asset purchases in the first place, is seeking to limit the plan, while policy makers such as Slovenia’s Marko Kranjec have said the bank may spend more and widen the scope of the program. In the letter, Nowotny said the covered-bond purchases are among the bank’s “concrete” measures.
The ECB initially debated a package of asset purchases worth about 125 billion euros that included commercial paper and corporate bonds, people briefed on the talks have said.
‘Policy of Reason’
The Federal Reserve and Bank of England are buying corporate and government bonds, effectively pumping new money into their economies in an attempt to revive growth.
ECB officials have publicly clashed over the best way to tackle Europe’s worst recession since World War II, making it harder for President Jean-Claude Trichet to present a united front. He will tomorrow unveil details of the plan to buy covered bonds, low-risk securities backed by mortgages and public-sector loans.
German Chancellor Angela Merkel said yesterday the ECB has “bowed somewhat to international pressure” in agreeing to buy covered bonds, indicating she shares Weber’s unease about the policy. She said she views “with great skepticism what authority the Fed has and the leeway the Bank of England has created for itself,” and urged central banks to return to a “policy of reason.”
Nowotny said in Vienna on May 26 that the ECB’s announced measures need to be given time to work and are “adequate in the medium term.”
‘Positive Effects’
In addition to the covered-bond plan, the ECB has cut its benchmark rate to 1 percent and said it will loan banks as much cash as they need for up to 12 months.
“The positive effects that these measures bring will certainly come in time,” Nowotny wrote in the letter. Still, he cautioned that while there are “first signs of stabilization” in the economy, “we have to face the fact that we’ll only see growth at a very low level in the next few years.”
Nowotny was responding to an April 20 letter from Austrian hoteliers, who are facing tighter financing conditions.
“The comments about the unconventional measures should be understood in an academic context and are to say that the ECB has not used all potential measures while they do in no way prejudice what the Governing Council will do,” said Oliver Huber, a spokesman for the Austrian central bank. The bank gets “numerous request from groups and people” and replies by “explaining what monetary policy can or cannot achieve in the current situation,” he said. “The letter to the hotel owners is one example.”
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