The European Central Bank has announced it has bought €16.5bn worth of eurozone government bonds so far as part of the eurozone rescue plan announced last week, and unveiled how it will make good its pledge to counter any inflationary side effects.
The scale of the ECB’s intervention was at the low end of analysts’ expectations, but still broke new ground for the guardian of the euro currency, which had previously forsworn buying government bonds outright.
The move split the ECB’s governing council amid fears the move would undermine polices aimed at ensuring price stability. Jürgen Stark, ECB executive board member, said at the weekend that he did not expect the programme to involve “massive sums”.
Jean-Claude Trichet, ECB president, has argued the ECB’s action is “totally different” to quantitative easing undertaken by the US Federal Reserve or the Bank of England. Instead the step was needed to counter severe tensions in eurozone bond markets.
No details were given but its €16.5bn purchases are almost certain to have been concentrated on the bonds of countries worst hit by the crisis – especially Greece.
To offset the impact on inflation, the ECB will on Tuesday launch an operation to absorb €16.5bn into one-week fixed-term deposits – in effect, withdrawing the liquidity it has injected into the financial system via its bond purchases. Another such operation would be held next week, it added – suggesting that the ECB had decided to provide weekly updates on the scale of its purchases, and to withdraw the liquidity with the same frequency.
The decision to buy government bonds ran into opposition within the ECB because of fears of the precedent it set in blurring monetary and fiscal policies/ Analysts have warned that purchases could become much harder to “sterilise” if the scale of the programme increased substantially. There were also worries that the ECB would be rewarding irresponsible fiscal behaviour by eurozone governments.
Last week, Mr Trichet said the decision had been approved by an “overwhelming majority” – an acknowledgement that a minority on the 22-strong council had voiced opposition. One opponent is likely to have been Axel Weber, Germany’s Bundesbank president, who announced afterwards that he viewed the move “critically”.
