Merkel criticizes central banks response to crisis

BERLIN Wed Jun 3, 2009 10:32am EDT

BERLIN (Reuters) - German Chancellor Angela Merkel issued rare public criticism of central banks on Tuesday, questioning their decision to pursue non-standard steps to fight the crisis and urging a return to "reason" in monetary policy.

"I view with a great deal of skepticism the extent of the Fed's powers and that the Bank of England developed its own small steps," Merkel said in a speech in Berlin.

"The European Central Bank has also bowed somewhat to international pressure with the purchase of covered bonds."

Merkel added: "Together, we must return to independent central bank policies and policies of reason."

She was speaking just two days before the ECB is due to present details of its program to purchase 60 billion euros in "Pfandbriefe," or covered bonds, to support bank lending and the broader economy.

Other major central banks like the U.S. Federal Reserve and Bank of England have been far more aggressive than the ECB in pursuing so-called non-standard measures like asset purchases.

The Fed, for example, announced in March it would buy up to $300 billion in longer-term government bonds, the first time it has taken such a step since the 1960s.

Last month the BoE raised the target for its asset purchase program to 125 billion pounds.

Analysts estimate the Fed and BoE measures amount to 8 percent and 2 percent of U.S. and British gross domestic product (GDP), respectively, compared to just 0.6 percent for the ECB's covered bond program.

Merkel has been a strong defender of central bank independence and has steered clear of publicly criticizing monetary policymakers in the past.

(Reporting by Noah Barkin, Kerstin Gehmlich, Sakari Suoninen; editing by Stephen Nisbet)