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Nowotny says ECB should be cautious on buying euro zone govt bonds - Nikkei

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11/03/2014 | 06:50pm EST
A euro logo sculpture stands in front the headquarters of the European Central Bank  in Frankfurt

(Reuters) - The European Central Bank should be cautious about whether to buy sovereign bonds from euro-zone countries, ECB Governing Council member Ewald Nowotny was quoted as saying by Japan's Nikkei financial newspaper.

The Austrian central bank chief said in an Oct 28 interview that the ECB should not be swayed by market pressure and should not be expected to pull a rabbit out of its hat at each policy meeting, the Nikkei reported on Monday.

The newspaper did not offer any direct quotes in an English version but paraphrased Nowotny's comments from a fuller version published in Japanese.

Asked whether the bank should more actively consider "quantitative easing" via bond purchases or wait to see the results of a Dec 11 long-term funding operation, Nowotny said the ECB should monitor the effects of policies already implemented.

To help support the flagging euro zone economy, the ECB, which meets on Thursday, has cut interest rates to record lows, offered banks cheap, long-term loans and begun buying private-sector assets.

The euro zone's central bank started buying covered bonds and plans to buy asset-backed securities (ABS), or bundled loans, later this year - both with a view to fostering lending to businesses and thereby supporting the bloc's economy.

Nowotny said last week the ECB "never should say never" to full-on quantitative easing, but that such a programme is not in sight at the moment.

Theoretically, the Nikkei quoted him as saying, the ECB could consider buying government bonds in proportion to each nation’s capital contributions. But he questioned the merits of this idea, as it would mean buying the greatest amount of debt from relatively strong Germany, according to the Nikkei.

ECB purchases of sovereign bonds would help push down the borrowing costs of the governments concerned, but for Germany these are already very low.

Full-on QE - essentially money printing by the central bank to buy sovereign bonds - would allow the ECB to make an impact in a large, liquid market.

However, any such purchase programme would be highly controversial, particularly in Germany, the euro zone's largest economy, where Bundesbank chief Jens Weidmann worries such a plan would fall into the realm of financing governments.

QE would arguably have less of a stimulative effect on the eurozone, where companies rely heavily on bank borrowing, than it did in the United States, where they make active use of the bond market, Nowotny said, according to the Nikkei report..

(Reporting by Shadia Nasralla and William Mallard; Editing by Sonya Hepinstall & Shri Navaratnam)

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