Finance news

European Central Bank council member Axel Weber said the bank will lower interest rates again and may extend the maturities of its loans to banks to push down long-term borrowing costs.

The ECB still has “room to maneuver” on interest rates “which we will use,” Weber, who heads Germany’s Bundesbank, said in a speech in Berlin today. In addition, offering banks loans for longer periods may “contribute to a desired flattening of the interbank yield curve” and “could help to guarantee financing security,” he said.

Weber’s comments suggest he favors expanding the ECB’s existing policy of lending banks as much cash as they want rather than following the U.S. Federal Reserve and the Bank of England and buying government or corporate debt to revive the economy. The Frankfurt-based ECB is under increasing pressure to outline a strategy for how it will counter the worst recession since World War II once it runs out of room to lower interest rates.

“The urgency of delivering further stimulus in the near term implies that the Council is ready to ease on April 2,” said Julian Callow, chief European economist at Barclays Capital. Before Weber’s speech he had expected the ECB to wait until May before cutting its key rate to 1 percent from 1.5 percent.

The bank this month lowered its benchmark lending rate to 1.5 percent, a record low. That’s still the highest among the Group of Seven nations. The Fed and the Bank of Japan have lowered their key rates to close to zero and the Bank of England’s is at 0.5 percent.

‘Different Animal’

All three of those central banks have said they will purchase government bonds in an effort to reduce long-term interest rates and revive economic growth, a policy known as quantitative easing cash advance.

“The ECB is a totally different animal to the Fed and the other central banks,” said Laurent Bilke, an economist at Nomura International in London and a former ECB forecaster. “The furthest it may push out the boat at this point in time is to enhance what it already has.”

The ECB currently offers banks loans at its prevailing benchmark rate for up to six months. Banks can borrow as much money as they want against eligible collateral.

“We’re not yet at a point where we would have to say that the provision of loans to the economy is no longer functioning,” Weber said.

The bank, which sets interest rates for the 16-nation euro region, is hemmed in by European Union rules that forbid it from buying bonds directly from governments. Any decision to buy debt in the open market may spark a dispute over which country’s securities to purchase.

French President Nicolas Sarkozy today urged the ECB to boost the euro-area economy by broadening the collateral it accepts when making loans and buying commercial paper.

“The central bank must widen the quality of paper it accepts,” Sarkozy told reporters after a meeting of European Union leaders in Brussels.

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