Weber call to stop buying state bonds could raise cost of debt
German bank president wants ECB to increase interest rates
Published 13/10/2010 | 05:00
THE European Central Bank should cease the programme of buying government bonds -- a process which may have kept down Irish borrowing costs -- and begin thinking about higher interest rates, Bundesbank president Axel Weber said yesterday.
His comments came as investment bank Goldman Sachs said the US Federal Reserve would increase its purchases of such assets to help avoid further recession. However, the US central bank's equivalent of Mr Weber -- Kansas City Fed president Thomas Hoenig -- said the benefits of further such purchases "are likely to be smaller than the costs".
Mr Weber said the ECB should stop its bond purchase programme (Securities Markets Programme) and expressed a view that the central bank may have kept other emergency measures in place for too long.
Irish banks rely heavily on the ECB's willingness to lend unlimited amounts of short-term funds -- often pledged against Irish government bonds as security.
"As the risks associated with the Securities Markets Programme outweigh its benefits, these securities purchases should now be phased out permanently," Mr Weber said, according to the text of a speech delivered in New York.
"There are risks both in exiting too early and in exiting too late. I believe the latter are greater than the former," Mr Weber said.
As a member of the ECB Governing Council, Mr Weber opposed the bond purchase plans when it began in May in response to the Greek crisis.
Economists at Goldman Sachs said the Fed would decide to increase its purchases of US government bonds at its policy meeting next month, helping the US avoid the "very bad" outcome of a renewed recession
The impact of such purchases on financial conditions "is one key reason why we expect the economy over the next six to nine months to be only 'fairly bad' rather than 'very bad'," Jan Hatzius, chief US economist at the investment bank, wrote.
Mr Hoenig, the only member of the Federal Open Market Committee to cast dissenting votes on the issue, reiterated his view that the bank should begin taking steps to lift interest rates from near zero.
Undertaking asset purchases without clear terms and goals "becomes an open-ended commitment that leads to maintaining the funds rate too low and the Federal Reserve's balance sheet too large," he said. The Fed purchased $300bn of treasuries in 2009 under a policy known as "quantitative easing" or QE. Traders preparing for another round of buying in the USA or UK have dubbed it QE2. (Additional reporting, Bloomberg)