UPDATE 1-ECB's Asmussen defends bond plan, says inaction riskier

Wed Nov 14, 2012 12:05pm EST

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* Says ECB keeps risks accompanying OMT bond plan small

* Says ECB has no targeted interest rate or spread with OMT

* Sees inflation below 2 pct next year, will act if it rises

By Paul Carrel

MAINZ, Germany, Nov 14 (Reuters) - The European Central Bank put together its new bond-buying programme because the risks of doing nothing would have been greater than those associated with the plan, policymaker Joerg Asmussen said on Wednesday.

The ECB announced the programme for struggling euro zone states in September to ease market concerns that the region's debt crisis was deepening.

"Excessively high risk premiums in short- and long-term interest rates can impact the working of monetary policy and thus also be dangerous for euro zone price stability," Asmussen told at an investor conference organised by Union Investment.

They could "outweigh monetary policy, or completely nullify or even reverse it," he said, endangering the ECB's ability to keep inflation at its target of just below 2 percent.

Defending the central bank's yet-to-be-activated bond plan, Asmussen said that while the purchases were not without risks, those would have to be compared to risks arising from doing nothing.

"We keep the risks fundamentally accompanying the OMT (bond scheme) as small as possible," said Asmussen, a member of the ECB's Executive Board.

Pressed by economist Nouriel Roubini on the ECB's strategy for using the OMT, Asmussen said: "We have no targeted interest rate, we have no targeted spread."

"The ECB ... should not overburden monetary policy," Asmussen said in a podium discussion with Roubini, adding that "the aim of the OMT is to take out the tail risk" of euro zone break-up rather than deliver uniform market interest rates across the euro zone.

When asked about the possibility of cutting interest rates, Asmussen said the ECB's rates are "already at historic lows."

The ECB has cut its main interest rate to 0.75 percent.

Asmussen noted that the ECB's mandate differs slightly from other central banks', and focuses on delivering price stability.

"I would not advise to start a debate to change the mandate," he said, adding that he expected inflation in the euro zone to fall below 2 percent next year.

"I think we don't have a risk that inflation will rise, as some in Germany see it," he said. "We will monitor this very carefully. If we see inflation risks rising, we would use instruments to contain them."

On banking supervision - the ECB is foreseen as assuming the role of euro zone bank supervisor next year - Asmussen said that to be effective, the central bank has to have the right to close banks which it deems unable to survive.

While national central banks would continue to do much of the day-to-day work, the ECB must be assured access to all information, Asmussen said.

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