The European Central Bank (ECB) added close to €600m to its stock of Irish government bonds in July even as it moved to normalise what had been massive support to the bond markets via quantitative easing (QE) to clear the way for this month’s interest rate hike.
The ECB ended net purchases under its pandemic-era bond-buying program in March and cut buying under its long-standing Public Sector Purchase Programme (PSPP) before ending it finally in July as part of a ‘normalisation’ policy to contract the bank’s balance sheet and reduce the inflationary effect of excess money washing through the economy.
The bank also raised interest rates for the first time in over a decade at the end of July for the same reason.
Anticipation of those moves by financial investors sparked a temporary spike in borrowing costs for countries including Ireland, but especially Italy, in mid-June as markets braced for a new era of higher interest rates.
Those debt yields came down in July after ECB President Christine Lagarde promised a new more targeted bond-buying tool to stave off a fresh debt crisis, but it now appears the bank was already able to shift funds under existing mechanisms to dampen the risk of a chaotic divergence between the debt costs of member states.
The Financial Times reported on Sunday that the ECB injected €17bn into Italian, Spanish and Greek debt markets between June and July, while cutting its stock of German, Dutch and French government debt.
The moves were made without increasing the size of its now closed pandemic-era bond-buying programme.
Meanwhile, data posted on the ECB website shows it also added €417m to its stock of Irish government bonds bought under the PSPP scheme in July and an extra €172m under the separate pandemic-era bond-buying programme in June and July.
While the ECB is no longer creating new money to fund bond purchases, it is free to reinvest the proceeds of bonds it already holds as they fall due.
It means ending QE will not end ECB bond purchases, with continued buying expected at a subdued level according to Ryan McGrath of brokerage Cantor Fitzgerald in Dublin.
“The ECB has committed to reinvest the proceeds as bonds it holds are redeemed so you are going to see continued activity, although that doesn’t have to be straight away, so if a bond is repaid in April reinvesting that might be spread evenly across the year,” he said.
The continued role of the ECB may help keep borrowing costs lower.