Nov. 6 (Bloomberg) -- European Central Bank council member Ewald Nowotny said the bank hasn’t decided yet whether to discontinue its 12-month loans next year, less than 24 hours after President Jean-Claude Trichet signaled December’s offer is likely to be the last.

“Whether there will be 12-month tenders after December depends on economic developments,” Nowotny, who heads Austria’s central bank, told reporters in Vienna today. “I can’t really say right now, it’s something we will discuss in December.” Nowotny later issued a statement saying his views on the tenders “are fully in line with those expressed by President Trichet.”

Trichet said yesterday he didn’t want to “dispel” market expectations that the bank would not prolong its offer of 12- month money to banks after the third tranche in December. Nowotny’s comments suggest some policy makers on the ECB’s 22- member Governing Council are concerned that withdrawing the bank’s emergency stimulus measures too soon could undermine Europe’s economic recovery.

“We see that the downswing has been stopped, but also that the upswing is only a very weak one,” Nowotny said. “The question that we have to ask, in my opinion, is whether we will succeed in turning this weak upswing into a stronger dynamic for the euro area, or are we facing the problem of heading into a lost decade like Japan had. I wouldn’t rule out this risk for Europe.”

‘A Step Back’

Yields on German two-year notes, which rose at least six basis points yesterday after Trichet spoke, fell three points on Nowotny’s comments to 1.28 percent.

“It’s certainly a step back from Trichet’s comments yesterday, which suggested that it’s definite the 12-month tenders are to be discontinued,” said Laurent Bilke, senior economist at Nomura International in London. “I wouldn’t attach the same importance to Nowotny’s comments, but what it does show is that the debate on the Governing Council is back.”

Trichet has faced one of his toughest challenges as ECB president this year as his council split over how to react to the worst recession since World War II. One camp resisted a push to loosen policy further while others, including Nowotny, argued for a more aggressive approach.

The 12-month loans are one of the ECB’s flagship tools to fight the financial crisis. The ECB loaned banks a record 442 billion euros ($657 billion) at the first tender in June and another 75 billion euros at the second in September at its benchmark interest rate of 1 percent.

Interest Rate

Nowotny said today the ECB will charge banks 1 percent on the 12-month funds in December too. Trichet yesterday refused to be drawn on the rate the ECB will charge.

“In December we will conduct another one-year tender, we’ve already announced that,” Nowotny said. “That means making unlimited liquidity available for a year at one percent.”

Austrian Central Bank spokesman Oliver Huber said Nowotny hadn’t intended to send a signal and was referring to “the current framework of the longer-term refinancing operations, which are conducted at 1 percent.”

“Everything is open for the December tender,” Huber said.

To contact the reporters on this story: Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net; Gabi Thesing in Frankfurt at gthesing@bloomberg.net.

Last Updated: November 6, 2009 09:22 EST