European Central Bank policymaker Axel Weber today urged a tight cap on its government bond buying program and warned extraordinary steps taken to ease the debt crisis were a risk to its main goal of price stability.
ECB president Jean-Claude Trichet also said the economy may expand more than expected in the second quarter, despite figures showing a slump in economic sentiment as the debt crisis starts to take a toll on the real economy.
The ECB abandoned a long-held resistance to buying government debt early this month, helping to calm bond markets and bring down borrowing costs for heavily-indebted Greece and other financially strained euro zone members.
Irish Central Bank governor Patrick Honohan welcomed the bank's government bond purchases as an "important" new weapon in its armory and said any risks associated with the policy are being managed.
"This has been an important extension, a use of tools that haven't been used before," Mr Honohan, who is also a member of the ECB governing council, said in an interview in his office in Dublin on May 28th. The decision "was exactly the right kind of prompt initiative" needed, he said.
The ECB's asset purchases are part of a European bid to rescue the euro after budget blowouts in Greece, Portugal, Spain and Ireland triggered a sovereign debt crisis. Not all of the central bank's 22 policy makers support the bond program.
Mr Honohan said he's "solidly behind" the decision to buy assets. "It's not in the normal course of the ECB's traditional approach to a toolbox, but it's not outside the range of the toolbox of standard central banking around the world in history," he said.
Mr Trichet defended the move as a necessary intervention. But Mr Weber, who has already gone public with his concerns, urged a tight cap on buying.
"Monetary policy has taken new paths in the wake of the crisis, I am critical of this because of the risks to policy stability," Mr Weber said in a speech prepared for delivery in Mainz.
To minimise the risk to price stability, he said the bond buying had to be targeted precisely at their goal and tightly limited in scale, although he did not give a number.
"The purchases of government bonds in the secondary market should not overshoot a tightly-capped limit," he said.
"These operations should have the character of a bridge facility until the financing facilities of the EU and special purpose vehicles take over."
Fears about the finances of some euro zone countries, notably Greece, Portugal and Spain, have driven a 15 per cent drop in the value of the euro since the start of the year.
Mr Trichet said euro zone governments need to make a "quantum leap" in improving budget oversight mechanisms to prevent recurrences of bad fiscal behaviour.
"These are challenging times for Europe and for the ECB," Mr Trichet told an Austrian central bank conference, warning that the ECB's bond buying would not allow countries to side step the hard task of scaling back spending and mending public finances.
Mr Trichet said the bond buying was "time-bound in nature" and was not akin to printing money - so-called 'quantitative easing'. Like Mr Weber he said it was aimed purely at getting trading in the euro zone bonds in question back up and running.
ECB money supply figures showed loans to euro zone households hit a record high although lending to firms fell to its lowest level in almost two years.
"Within the euro area, some recent data suggest a phenomenon of a recovery in growth in the second quarter of 2010 that is slightly higher than expected," Mr Trichet said. However, he recommended caution, saying future growth was not "set in stone".
Bloomberg, Reuters