FRANKFURT- Fresh bond purchases and a multi-tier deposit rate generated the most opposition at the European Central Bank's September policy meeting, even as all rate-setters agreed on the need for more stimulus, the accounts of the meeting showed on Thursday.
Facing a protracted slowdown, the ECB decided last month to cut rates deeper into negative territory, buy bonds indefinitely and provide banks some relief from negative rates by introducing a tiered deposit rate, all in the hope of cutting borrowing costs to stimulate investment and growth.
But over a third of policymakers - including the central bank chiefs of the bloc's biggest countries, France and Germany - opposed the new bond purchases, setting off the biggest public policy clash of ECB chief Mario Draghi's eight-year term.
Opponents said that by keeping bond purchases open ended, the ECB could "give rise to demands" by markets for even more buying over time, which would then put in doubt the various self-imposed limits the ECB placed on the scheme.
"This would exhaust the purchasable universe and call into question the programme limits, which were considered important to ensure that the boundary between monetary policy and fiscal policy were not blurred," the account of the meeting showed.
Indeed, even the bank's monetary policy committee, which prepares options for policymakers, opposed the fresh bond purchases and the bank's legal committee pointed to the dangers of breaching the thresholds, the Financial Times reported on Thursday.
While committee recommendations are not binding, the opposition from both policymakers and staff at national central banks highlight the division, which may weaken the effectiveness of policy since much of it relies on convincing markets of the ECB's resolve.
The ECB can buy up to a third of each country's debt and it is getting close to this threshold in Germany, indicating that incoming ECB chief Christine Lagarde, who takes over from Draghi on Nov 1, will have to contemplate amending the bank's own rules.
"A number of members assessed the case for renewed net asset purchases as not sufficiently strong, either because they deemed them to be a less effective instrument... or because they deemed them to be an instrument of last resort," the ECB said in the account.
The minutes did not specify how much room the ECB had to buy more bonds but said there was a "significant" period before the limits would be hit.
The minutes also showed that some policymakers were ready to support a bigger, 20 basis point rate cut if the stimulus package excluded fresh bond purchases.
But reservations were expressed about the two-tier deposit rate, which would shield banks from the ECB's penalty charge on up to six times their mandatory reserves.
Policymakers noted that monetary transmission was working well and banks were benefiting from improved terms on its long-term loans. Some even argued the calibration of the system could actually push up market rates in certain places.
Still, the minutes also showed that all policymakers agreed on the need for more stimulus given weak growth and stubbornly low inflation expectations and the bond purchases were eventually supported by a "clear majority".
Tiering had a "majority", still well short of a "very large majority" for a rate cut.
The ECB targets inflation at just below 2 percent but has undershot this target since 2013 and its projections suggest it would continue to miss for years to come.
The ECB will start the bond purchases at 20 billion euros a month on November 1 and plans to continue them "for as long as necessary".
(Editing by Francesco Canepa and Toby Chopra) ((Balazs.Koranyi@thomsonreuters.com; +49 69 7565 1244; Reuters Messaging: balazs.koranyi.thomsonreuters.com@reuters.net))
