June 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet’s efforts to heal an unprecedented rift among policy makers may be aided by signs of an economic recovery.

Even as policy makers bicker over the extent of asset purchases, the ECB is unlikely to signal it will buy more than the 60 billion euros ($85 billion) of covered bonds it has already announced, economists said. The Frankfurt-based ECB will today also keep its benchmark interest rate at a record-low 1 percent, according to 52 of 54 economists in a Bloomberg survey.

“The end of the free-fall of the global economy might just get the ECB off the hook here,” said Laurent Bilke, an economist at Nomura International in London. “Things are looking up and the hawks will not be easily convinced that more needs to be done.”

The 22-member Government Council has been split over whether to follow the Federal Reserve and Bank of England, which have cut their key rates to close to zero and are buying government and corporate bonds to tackle the worst recession in six decades. The debate over how far the ECB should go reached the highest level of European government this week, with German Chancellor Angela Merkel backing the Bundesbank’s view that asset purchases are a step too far.

Weber’s Reluctance

Bundesbank President Axel Weber argues there is no real risk of deflation and buying assets to flood the economy with money is an unnecessary risk that could sow the seeds of future crises. Officials from smaller nations such as Slovenia’s Marko Kranjec and Cyprus’s Athanasios Orphanides are less certain and have indicated the ECB could buy a broader range of assets to fight the recession.

The Bank of England today kept its key rate at 0.5 percent and reiterated its plan to buy 125 billion pounds ($206 billion) of government and corporate bonds.

The ECB announces its rate decision at 1.45 p.m. and Trichet will unveil details of the covered-bond purchases at a press conference 45 minutes later. Investors will be looking for information on the types of covered bonds to be purchased, whether they will be bought on the primary or secondary markets, and whether national central banks will conduct the operations.

Evidence is mounting that the worst of the financial crisis may have passed. The contraction in Europe’s manufacturing and service industries is easing, European confidence in the economic outlook rose to a six-month high in April and business confidence in Germany, Europe’s largest economy, increased for a second month in May.

‘Green Shoots’

Praktiker AG, Germany’s second-biggest home-improvement retailer, said on May 27 that revenue has rebounded in its domestic market since the end of March.

“The ECB will point to the green shoots in the economy,” said Carsten Brzeski, an economist at ING Group in Brussels. “They’ll send a clear signal and say: ‘Folks, that’s it for now’.”

Merkel on June 2 scolded the Fed and Bank of England for pumping too much money into their economies and said that by deciding to buy covered bonds, the ECB had “bowed somewhat to international pressure.” She urged a return to a “policy of reason.”

“I think there’s an element of the classical German school of thought, which is we’ve done enough,” said James Nixon, an economist Societe Generale SA in London. “I’m very concerned that much more has to be done to stimulate the economy from here.”

Original Package

At its May 7 meeting, the ECB debated a package of asset purchases worth about 125 billion euros that included commercial paper and corporate bonds, before agreeing to buy only covered bonds, people briefed on the talks have said. Covered bonds are low-risk securities backed by mortgages or public-sector loans.

Weber may have been instrumental in having the package reduced. He said on May 12: “Note well: It’s not our goal simply to print money. I currently don’t see the need for outright purchases of further private debt obligations.”

Others want to keep that option open. Kranjec said in a May 13 interview that the ECB hadn’t ruled out purchasing a wider range of assets and was “very likely” to spend more than 60 billion euros.

Austria’s Ewald Nowotny, in May 29 letter to hoteliers obtained by Bloomberg, said the ECB can buy commercial paper and bonds to help lower long-term interest rates.

The euro-region economy will shrink 4.2 percent this year, according to the International Monetary Fund. That’s more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K. Trichet said last month that the ECB’s latest staff projections, due today, are likely to be in line with those of the IMF.

In Germany, General Motors Corp.’s Opel brand is struggling to fight the economic slump. The German government plans to provide 1.5 billion euros in loans to keep the unit afloat.

The ECB will keep the door “wide open” for additional policy action, said Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London. “Apparently there’s no consensus in the Governing Council, so there’s a chance the ECB will come up with a surprise.”

To contact the reporter on this story: Christian Vits in Frankfurt cvits@bloomberg.net

Last Updated: June 4, 2009 07:29 EDT