Disquiet within ECB laid bare after cash injection

Thu Mar 1, 2012 10:37am EST
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By Eva Kuehnen

FRANKFURT (Reuters) - Some European Central Bank policymakers are alarmed that a dramatic loosening of lending policy stemming from a 1-trillion-euro wave of cash unleashed into the financial system will fuel imbalances in the euro zone and stoke inflationary pressures.

Led by Bundesbank chief Jens Weidmann, who was previously a top advisor to German Chancellor Angela Merkel, they are pushing for the central bank to think about an exit strategy after it fed banks 530 billion euros on Wednesday in the second of two cheap, ultra-long funding operations.

The signs of internal division add weight to what sources have already told Reuters: that the central bank does not intend to offer any more cheap three-year cash. The chances of interest rates dropping below their record low one percent also appear to be diminishing.

The huge take-up at Wednesday's so-called LTRO meant that in the space of two months the ECB has injected over a trillion euros into the financial system.

While the twin operations have banished the threat of a credit crunch, the ECB hawks are worried that the ploy risks fostering banks forever dependent on external support, fuelling imbalances between strong and weak euro zone members and priming an inflationary timebomb for the future.

Weidmann wrote to ECB President Mario Draghi last month to express concerns about risks stemming from a decision the ECB took in December to ease rules on the collateral banks must put up to tap its funding operations, a central bank source said.

That decision, which Weidmann opposed and now wants reversed, resulted in some 800 banks partaking in the ECB's second offer of one percent money on Wednesday - a marked increase from the 523 bidders at the first LTRO in December.

"This shows that there are diverging views on all of this in the ECB Governing Council and it is not likely go away until the sovereigns come up with some big measures, which looks rather unlikely," said Citigroup economist Juergen Michels.   Continued...

A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt February 29, 2012. Picture effect due to lens zoom burst. REUTERS/Alex Domanski