WRAPUP 2-ECB policymakers differ on scale of asset purchases

Published: 14 May 2009 17:32:15 PST

* ECB policymakers differ on covered bond purchases

* Sramko sees further discussion of non-standard moves

* Wellink says current plans are enough

* Papademos says recovery may start sooner than expected

VIENNA, May 14 - European Central Bank policymakers differed on Thursday about how far to support the economy with unconventional measures, after an upturn in some data sparked hopes a recovery might start earlier than expected.

The ECB cut interest rates to a new record low last week and said it would spend about 60 billion euros ($81 billion) buying covered bonds to pull down longer-term borrowing costs.

But diverging views since then suggest there is little consensus about how to implement the plan, even though President Jean-Claude Trichet said the decision had been unanimous.

The intense debate resurfaced on Thursday at a conference in Vienna, as Governing Council members aired contrasting views on whether the 60 billion euros in bond purchases would be enough to tackle the euro zone recession.

"The current amount is enough for the time being," Austria's Ewald Nowotny told reporters, adding that no further steps were being discussed.

In a similar vein, Dutch central bank Governor Nout Wellink said the ECB had taken its decision, and added: "It follows from that we think that at this very moment this is enough."

But Slovakia's Ivan Sramko said he was sure policymakers would discuss other options on non-standard measures.

By contrast, Germany's Axel Weber has said in recent days that he sees no need for further asset purchases and that the bond plan should not exceed 60 billion euros, whereas Slovenia's Marko Kranjec has said the ECB is likely to spend more.

RATES ADEQUATE

Policymakers have also chosen to highlight different parts of the ECB's interest rate stance. After last week's rate cut Trichet said the main refi rate was appropriate at 1.0 percent, but did not ruled out further cuts.

Nowotny also said in Vienna that ECB rates were adequate for now, while Sramko said there had been no decision on a rate floor.

Analysts, who believe the ECB will keep rates on hold until the end of next year, said the disagreement between policymakers was not helpful for financial markets.

"There's volatility in viewpoints at the moment, which is creating instability," said Marc Ostwald, strategist at Monument Securities, as the euro fell against the U.S. dollar.

Trichet, attending a meeting in Paris with French President Nicolas Sarkozy on Thursday, declined to comment on whether disunity at the central bank was unsettling investors.

GROWTH RESUMING SOONER?

At the Vienna conference, ECB Vice-President Lucas Papademos said that there were signs the worst was over for the economy, despite a further deep contraction in the first quarter,

Nowotny also said central banks could still boost an economy even if key interest rates approach zero. Central banks could buy government or corporate bonds or other assets, he said, without commenting specifically on the ECB's future plans.

"In times of crisis it may happen that the traditional instruments of monetary policy don't suffice, or they become blunt," he said. "This is particularly true of the key interest rate, which may eventually approach the lower boundary of zero. Yet in such a situation, there are still other measures to which central banks may turn."

Papademos concentrated on the recovery and noted rising confidence and industrial orders. "Recently, we have observed an increasing number of positive signs suggesting that the economy is stabilising and that the recovery may start sooner than previously envisaged," he said.

"However, the available economic data and survey indicators point to a stabilisation at very low levels and economic activity in the euro area is likely to gradually recover in the course of 2010."

Other policymakers cautioned against placing too much weight on positive signs. "Don't become too optimistic when you see a few swallows," said Wellink.

Nowotny echoed his comments, saying it is important to stay realistic. "Forecasts show that we are still in a very, very deep and grave recession," he added. However, he also noted signs of stabilisation, especially in the financial sector.

ECB policymakers have been more cautious about detecting "green shoots" of economic recovery than some of their peers. A survey of professional forecasters, published by the ECB on Thursday, showed that economists had again downgraded their expectations of euro zone GDP for this year and next.

The survey showed they expect the economy to contract 3.4 percent this year, and grow a sluggish 0.2 percent next year.