The European Central Bank kept its government bond purchase programme dormant last week as it readies the launch of a new scheme that will work in tandem with European rescue mechanisms to alleviate pressure on struggling euro zone countries.
The ECB has not used its Securities Markets Programme (SMP) for more than five months in a row now and with 2.5 billion euros of previously bought bonds maturing, the overall amount it has spent since starting the programme in May 2010 now stands at 208.5 billion euros.
The ECB has grown increasingly doubtful of the SMP's effectiveness, acknowledging that the purchases lessen the incentive for countries to reform, which is why it wants to tie future bond market interventions to strict conditions. ECB President Mario Draghi signalled earlier this month the bank may start buying government debt to reduce Spanish and Italian borrowing costs, but only once the countries had turned first to the region's rescue funds for help and agreed to certain terms.
The ECB is expected to reveal further details of its new programme after its September 6 policy meeting. Central bank sources told Reuters last week the option of setting interest rate band targets for the purchases was gaining in favour among central bankers, while setting an implicit yield target was also under discussion. The sources added that the decision would not be made before the ECB's September 6 meeting.
In a Reuters poll of fixed income strategists and economists last week sixteen out of 20 said the ECB would not set a cap on those countries' government bond yields, a defined level at which it would step into the market and purchase those bonds. Germany's Bundesbank is not in favour of any further bond purchases and has stepped up its opposition over the weekend, saying plans to buy bonds risked becoming a drug on which governments would get hooked.
The Bundesbank retains substantial influence within Germany and on financial markets due to its inflation-fighting credentials but, as just one of 17 constituents at the ECB, it is unlikely it could scupper Draghi's plan. As usual, the ECB will take the same amount as weekly deposits from banks on Tuesday to counterbalance the buys and neutralise any threat of them fuelling inflation.