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ECB steps to buoy economy are enough for now

The European Central Bank's current efforts to boost the euro-zone economy go far enough unless the situation deteriorates markedly, ECB Governing Council member Axel Weber was quoted as saying.

In an interview with the Financial Times Deutschland, Weber backed the ECB's moves to cut its main interest rate to 1% and buy about €60 billion worth of covered bonds.

Some of the ECB's 22 policymakers have suggested the ECB could go further, but Weber's comments made it clear he sees no need for expansion at the moment even though he warned against taking an overly optimistic view of the recovery.

“Unless things get noticeably worse, in my view, the package of measures decided until now is sufficient,” he was quoted as saying when asked if ECB's asset purchases would stop at covered bonds.

“We have to turn our primary attention in terms of monetary policy to letting the steps we have already undertaken take effect. There are still things in the pipeline.”

Weber said the step exposed the ECB to only slim risks and the central bank had every intention of putting its pledge into action, with details to be announced in June.

Also, the 1% level for the main refi rate was adequate and took into account a hefty downward revision in ECB staff projections, also due for release in June, he said.

The comments are the latest in a series of differing public statements about how far the ECB should go to support the recovery, although policymakers have denied any major split.

Weber said the ECB's baseline scenario was for a weak economic recovery, no credit crunch and no deflationary spiral.

“We expect to have some months of negative inflation rates in summer, but toward the end of the year, inflation will rise again to levels of 1% of above,” he told the paper.

Weber said there were signs that the downward economic trend was easing in industrialized and developing countries, but they were still in a period of weakness and labor markets could worsen further.

“I really warn against overly exaggerating the signs of hope on financial markets and the signs of a calming in the economic cycle,” Weber said.

“The financial crisis is just starting to reach people, through job losses. Declaring the start of the recovery prematurely has inherent dangers. People become disappointed, and that can have an enormous negative impact on confidence.”

In Germany, the euro-zone's biggest economy, the high point of unemployment was likely to be reached only in winter 2010/2011.

“For Germany, I see slightly positive growth rates only in mid-2010,” Weber said, in a slight shift from earlier comments flagging positive growth rates only in the second half of 2010.

He said he expected a similar profile in the euro zone, with growth only likely to come near its long-term potential in 12 to 18 months' time.

Weber also said US-style bank stress tests were not suited for the euro zone, given the diversity of banks' portfolios and operations and sweeping comparisons were therefore “not very meaningful and potentially misleading.”

“Anyone who draws direct conclusions from them for the possible capital requirements is not doing justice to their complexity,” he was quoted as saying of stress tests. (Reuters)