Saturday 27 May 2017

ECB bond failure risks adding to pricing pressure

Donal O'Donovan

Donal O'Donovan

THE European Central Bank (ECB) risks adding to inflation after it failed this week to 'sterilise' €13.5bn of the €73.5bn of government bonds it has bought since May.

The ECB creates the money it uses to buy bonds, but under the bond-buying scheme it aims to match any money it puts into the economy as a result of buying government bonds by taking an equal amount of money out of the economy through taking in deposits of cash from banks.

The news came as the ECB said the rate of growth in M3 money supply, which the ECB uses as a gauge of future inflation, was 1.9pc in November, up from 0.9pc a month earlier. M3 is a broad measure of money supply in the economy -- it includes cash in circulation, some forms of savings and money-market holdings.

The ECB planned to 'sterilise' €73.5bn, equal to the total amount spent buying government bonds this year, but has admitted it only managed to take €60.78bn out of the money markets by taking in deposits.

The deposits used to cancel the impact of the bond purchases are taken in for fixed one-week terms, so the full amount purchased since May has to be matched by new deposits every week.

The result is the so-called 'sterilisation', which the bank reckons frees it to buy the bonds without driving up inflation or devaluing the euro.

The latest news from the ECB showed that European banks -- desperate to hold cash on their balance sheets for end of year reports, being put together this week -- are unwilling to put funds on deposit.

That is likely to be a temporary issue but failing to cancel out the effect of the purchases adds to the sense that buying government bonds over the longer term is stretching the ECB's operational capacity.

Earlier this month, the ECB had to call for fresh capital to shore up the bank against potential losses from its purchases of government bonds.

Meanwhile, in a new report published this week, the ECB said loans to households and companies in Europe grew at a faster rate in November, thanks to growth in core eurozone economies.

Lending to the private sector was up 2pc compared with the same time last year earlier, after growing an annual 1.5pc in October, the ECB in Frankfurt, Germany, said yesterday.

Irish Independent

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