FRANKFURT (MNI) – European Central Bank policy-makers, following
their mid-month meeting, have dampened expectations of an interest rate
cut in October as fresh speculation about the effectiveness of the ECB’s
new bond buying program emerged.

“Interest rates are part of the standard instruments of central
banks. However, currently I see no need for a change in interest rates
in the euro area,” Ewald Nowotny said Tuesday in a live online chat with
Austria’s Die Presse.com.

“As regards the deposit facility, a negative interest rate would be
theoretically possible, but practically I don’t consider [it] either
desirable or realistic,” Nowotny added.

Nowotny’s comments follow those of Executive Board member Benoit
Coeure who said on Sunday that “the jury is open as to whether there
should be another rate cut.”

“It’s not absolutely obvious that another rate cut would be
necessary,” Coeure added. While growth should be “very weak” this year
and next, “there is some persistence in inflation data in the euro area
that warrants caution as regards the possibility of further rate cuts,”
he added.

Ahead of the ECB’s mid-month meeting last Thursday, Vice-President
Vitor Constancio told MNI that “this consideration of interest rates was
not an issue in the last meeting,” since the ECB was focused on
non-standard measures. “And I think that the rates now are okay for the
moment.”

Meanwhile, fresh concerns over the effectiveness of the new ECB’s
bond buy program (OMT) emerged on Tuesday, sending a shiver through
financial markets.

German tabloid Bild reported that in-house lawyers at the ECB and
the Bundesbank were checking both what proportions and duration the
program could reach before it might breach EU treaties. Bild said the
central banks were preparing for the possibility of the issue being
referred to the European Court of Justice.

The newspaper did not reveal its sources and neither central bank
was willing to comment on the report.

Nowotny stressed in his online chat that the ECB does not have to
be concerned about legal challenges. “I am operating on the assumption
that the bond-buying program does not contravene EU law.” The head of
the Austrian National Bank added that “in the view of the ECB and in my
view, the ECB is acting fully within the framework of its mandate.”

Bundesbank President Jens Weidmann, who is the only Governing
Council to have opposed the OMT, appears to be less certain about the
legality of the program. Following the ECB’s announcement of the new
bond by program on September 6, the Bundesbank released a statement
warning that debt market intervention by the ECB is “tantamount to
financing governments by printing bank notes.”

The Bild Zeitung report came a day after David Marsh, chairman and
co-founder of the Official Monetary and Financial Institutions Forum
(OMFIF), speculated that the Bundesbank might use Article 10 of the
ECB’s statutes to limit any bond buys under the OMT once it becomes
operational.

“Article 10 of the ECB’s statutes says that the one-man-one-vote
method should not apply to ECB decisions affecting its capital, transfer
of national central banks’ foreign assets, allocations of monetary
income and net profits and losses,” Marsh wrote. “If the OMT does indeed
get going, the Bundesbank may have some legal tricks up its sleeve to
limit its implementation.”

ECB President Mario Draghi would not be deterred by the widespread
criticism of the OMT program or legal concerns about it in Germany.
Today, Draghi marched into the heart of orthodoxy (a conference of the
German Industrial Association in Berlin) and staunchly defended the OMT
program.

He also continued to display optimism that the Eurozone is on the
right path.

“My firm belief and central message to you today is that – provided
all policymakers persevere with the necessary reforms – we have a number
of reasons to be positive about where the euro area is heading,” Draghi
said.

“We’re seeing signs of improved sentiment in financial markets and
we expect the economy to return to growth next year,” he added. “Clear
progress is being made towards addressing the fundamental causes of our
current challenges, deficits are being reduced, rebalancing is happening
and governance is being reformed,” he reckoned.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@mni-news.com

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