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9th Dec 2022

ECB divided on government bond-buying plan

  • Divided on QE? The ECB's top officials will decide next week on whether to begin a government bond-buying programme. (Photo: European Central Bank)

Divisions among the European Central Bank’s top officials about the expected introduction of a government bond-buying programme have been laid bare after a German member of the bank’s executive board highlighted her concerns to media.

In an interview with Der Spiegel on Saturday (January 10th), Sabine Lautenschlager said that she was “currently not convinced by large-scale purchases of government bonds”, a move which she described as “the last resort”.

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“There must a threat of exceptional risks materialising, and there must be reasonable balance between the benefits of, and risks entailed in, such a programme. I do not believe that to be the case at present. What we should do instead is wait until the measures that we have put into place only recently can take full effect.”

The ECB’s governing council will meet on 22 January to discuss whether to follow in the footsteps of the US Federal Reserve and the Bank of England by buying up government bonds - also known as quantitative easing - hoping that injecting more cash into the economy will drive up demand and force up prices in the eurozone’s struggling economy.

ECB president Mario Draghi stated earlier this month that “concrete measures” were being prepared to establish a QE programme in the coming weeks.

Lautenschlager and Jens Wiedmann, the chairman of the Bundesbank, are Germany’s two representatives of the 25 member governing council. Wiedmann has continually voiced his scepticism about a government bond-buying programme.

For his part, fellow executive board member Benoit Coeure was more cagey in an interview with France 24 on Sunday (11 January), commenting that a QE programme “must also create confidence” and be “a tool that brings together Europe, which does not divide Europe”.

He also left open the prospect of delaying the introduction of a programme, describing the 22 January meeting as “an opportunity to do so, but it's not the only opportunity”.

Despite the objections, market analysts appear confident that an ECB quantitative easing programme is a case of ‘when’ rather than ‘if’.

“it will be very hard, if not impossible, for the ECB not to announce QE,” said ING chief economist Carsten Brzeski.

Lautenschlager and Coeure also played down the prospect of a sustained period of deflation in the eurozone after EU statistics agency Eurostat announced last week that consumer prices across the single currency area fell by 0.2 percent in December, the first time that the bloc has seen negative inflation since 2009.

“You can’t speak of deflation at the moment,” she said. “What we are observing is a persistently low inflation rate that is due, among other factors, to the fact that prices of energy and food have declined significantly.”

“I cannot see any signs of consumers expecting steadily falling prices and thus changing their spending patterns.”

Although Eurostat attributed the fall into deflation to a 6.3 percent fall in energy prices on the back of tumbling oil prices, Mario Draghi has admitted that the eurozone economy faces a heightened risk of deflation over the next six months. The ECB is required to keep price increases as close to 2 percent as possible.

Meanwhile, on Wednesday the European Court of Justice will release its preliminary opinion on the legality of the ECB’s Outright Monetary Transactions (OMT) programme which, announced in September 2012 at the height of the eurozone crisis, allows the bank to buy potentially unlimited amounts of government bonds.

Peter Gauweiler, a German MP from the Christian Social Union, a junior member of chancellor Angela Merkel’s coalition, is leading the plaintiffs.

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