FRANKFURT (Reuters) - The European Central Bank’s interest rate cut on Thursday was a pre-emptive strike, policymaker Juergen Stark said on Friday, and urged the bank to call an early halt to its sovereign bond-buying programme.
The comments by Stark, who will step down from the bank’s six-strong Executive Board at the end of the year, signal the ECB is not preparing to cut its key policy rate again this year.
He also stressed that the bank’s programme of buying sovereign debt was temporary and dismissed suggestions it should be made permanent even as the ECB faces pressure to ramp up purchases to tackle the euro zone debt crisis.
The controversial programme has increasingly come into focus as the debt crisis has deepened due to uncertainty about Greece’s future in the euro zone. Many analysts see ECB bond buying, and the firepower it could unleash, as the only way to steady markets.
Stark is quitting the ECB early this year in what sources have said is a protest against the bond-buying programme.
The ECB’s new president, Mario Draghi, said on Thursday the programme was “temporary” and “limited,” reiterating the stance of his predecessor Jean-Claude Trichet and suggesting Draghi wants to keep up pressure on euro zone governments engulfed by the debt crisis to reform.
“Mario Draghi made clear that this is a temporary measure and it’s no secret that I have never been a particular fan (of the programme),” Stark told a conference in Frankfurt.
“I expect that we should end this programme as soon as possible, because it sets false incentives for member states, for governments to bring their budgets in order.”
After the event, Stark expanded on his comments, ruling out making the programme permanent, as was suggested during the Cannes G20 meeting.
“This is not an option,” he told reporters.
Stark suggested markets were wrong to have been surprised by Thursday’s ECB decision to cut rates to 1.25 percent at its first policy meeting under Draghi.
“Yesterday’s decision has nothing to do with pragmatism,” Stark said, adding that he made the proposal to cut rates.
“We are witnessing a strong cooling of the global economy and in the euro zone.”
But, he also flagged that the ECB plans to keep rates on hold until at least the end of the year.
“We anticipated the deterioration of the economic situation over the next couple of weeks, so this was a pre-emptive decision,” the German said. “We never pre-commit, but I would like to stress this was a pre-emptive decision.”
Stark’s fellow Executive Board member, Jose Manuel Gonzalez-Paramo said on Friday that inflation should remain the central bank’s priority.
“Monetary policy must remain focused on its key objective of delivering price stability,” he said in Madrid.
Stark’s opposition to the ECB’s bond buying is based on a belief, shared by many at the central bank, that the onus should be on the crisis-hit countries to make economic reforms and fears that ECB market intervention, which can reduce government borrowing costs, could reduce their incentive to reform.
Stark said euro zone countries receiving aid from their wealthier peers must use that help to put themselves on a stable footing.
“Solidarity is not a one-way street,” he said. “It calls for input from both sides, from those who give as well as those who take. The financial support of the donor countries helps the crisis states to buy time to carry out reforms.”
ECB bond buying has helped keep surging Italian bond yields in check as Italy’s high debt has become a focus of market attention. Italy agreed late on Thursday to allow the IMF to monitor its progress in carrying through economic reforms whose delay has sapped market confidence in the country and ravaged its government bonds.
Draghi, himself an Italian, gave no hint on Thursday that the ECB’s bond-buy programme would be accelerated despite the chaos in Greece threatening to engulf the much larger economies of Italy and Spain.
“At this juncture they want to stress that they don’t see it as their remit to be the lender of last resort to governments,” RBS economist Nick Matthews said of the ECB, adding that the central bank still wanted markets to function in an orderly way to allow the transmission of its monetary policy.
“If the governments are trying to put the Italian politicians under pressure to put in place the necessary reforms, you don’t want to let them off the hook by all of a sudden buying huge amounts of their bonds,” he added. “So it’s a balancing act we’ve got here.”
Matthews expected the euro zone’s rescue fund, the European Financial Stability Facility, would have insufficient firepower to restore order to markets, even if it is leveraged to 1 trillion euros, and that the ECB would ultimately have to increase its bond purchases.
“We think that ultimately they will be forced to step up massively their bond purchases in order to prevent a new escalation of contagion risks across the system,” said Matthews, who was among a minority of economists who forecast the ECB’s rate cut on Thursday.
Additional reporting by Paul Carrel and Marc Jones; Editing by John Stonestreet and Susan Fenton