ECB Preview: Sterilized Bond Buying? [Acting Man]
September 7, 2012 Leave a comment
The Latest Rumors
Euro area credit markets were calm ahead of the ECB meeting, as new conjectures regarding the plans to be announced were reported in the financial press.
One curious aspect to this is that the rumor of the day on Wednesday was that the ECB is considering ‘unlimited, but sterilized bond buying’ without setting any yield targets as was previously suspected.
Just in case readers are wondering where all these rumors are coming from, journalists are not just making them up: rather they get tidbits of information from their inside sources that tell them about the state of the discussion as it happens. In other words, all the possibilities that were subject to rumors over recent weeks were probably debated internally by the ECB’s various poobahs and minions. We suspect that these are at times leaked intentionally, in order to gauge the reaction of the markets and the public.
The latest rumor was relayed by Bloomberg on Wednesday:
„European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said.
Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.
The euro jumped half a cent on the report and traded at $1.2611 at 5:40 p.m. In Frankfurt. European stocks advanced. An ECB spokesman referred to an Aug. 20 statement in which the Frankfurt-based central bank said it was misleading to report on decisions that haven’t been taken yet.
Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to wrest back control of interest rates in the fragmented euro-area economy and ensure the survival of the common currency. Policy makers are deliberating on the plan today and Draghi will announce whether it has been agreed to at a press conference tomorrow.”
There certainly are quite a few people out there who are rightly worried about the inflationary effects of whatever action will be announced. However, the financial markets probably want monetary inflation. After all, sterilized intervention has already been tried with the SMP and has not even managed to fulfill the goals the planners themselves had set for the program – the program simply failed to suppress the targeted bond yields.
We should point out here that we believe all of these activities are futile and certain to produce negative long term consequences, we are merely trying to look at this from the point of view of the interventionists and what they aim to achieve.