The European Central Bank on Thursday resumed buying government bonds and offering loans to the region’s banks in an attempt to relieve tensions in eurozone financial markets.
The announcement is the latest in a flurry of central bank activity as fears mount over the state of the global economy. Hours earlier, the Bank of Japan intervened in the currency markets to slow the yen’s rise and announced an expansion of its asset-purchase programme.
It also follows the Swiss central bank’sdecision to drop its target rate close to zero and inject SFr50bn in liquidity to weaken the Swiss franc.
Jean-Claude Trichet, ECB president, said at a press conference in Frankfurt that the bond-purchasing operation was “ongoing”. “I never said myself it was dormant,” he added.
When the eurozone debt crisis erupted in May last year the ECB launched its securities market programme, under which it has acquired €74bn of bonds issued by the Greek, Irish and Portuguese governments. But the programme has been inactive since March.
Asked for further details about the programme, Mr Trichet said: “I wouldn’t be surprised that before the end of this teleconference you would see something on the market.”
While Mr Trichet was speaking, traders said that the ECB was buying Portuguese and Irish government debt.
One trader said: “It is another bunch of half measures from Europe again. Why buy Ireland or Portugal?” An investment bank strategist said: “It is like sending a warning signal to markets: if you don’t behave we will send out the big bazooka.”
Mr Trichet said with renewed tensions the financial markets the ECB had decided to conduct a refinancing operation with a maturity of approximately six months.
Following the announcement Irish 5-year bond prices jumped 1.8 points to 80 per cent of face value. Portuguese 2-year prices initially rose 1.2 points to 85.8 per cent of face value but soon fell back to 84.8 per cent.
Italian and Spanish borrowing costs spiked after investors realised the ECB was not buying those countries’ bonds. Spain’s 10-year bonds yielded 6.29 per cent in the afternoon, having been as low as 6.06 per cent in the morning. Italy’s 10-year yield was up 5 basis points to 6.17 per cent on the day.
The latest intervention by the ECB followed the decision to leave its main interest rate unchanged at 1.5 per cent.
The rate decision, which was expected, followed two increases in official borrowing costs earlier this year – most recently in July. It followed economic reports suggesting the eurozone economy was slowing significantly, with rising investor alarm about Italian and Spanish debt levels posing substantial risks to economic confidence.
Until recently, financial markets had pencilled in further ECB interest rate rises this year. The ECB fears temporarily high inflation rates caused by surging energy prices will become entrenched by pushing up other costs. But after July’s meeting Mr Trichet deliberately sent no signals about further steps, leaving the ECB room for manoeuvre.
Since then, purchasing managers’ indices have shown that private sector eurozone activity slowed to a near standstill in July, while economic sentiment has tumbled to the lowest for a year. Providing some reassurance, Germany’s economics ministry reported ahead of the ECB meeting that the country’s manufacturing orders had risen by 1.8 per cent in June compared with the previous month. That suggested significant momentum remained behind growth in Europe’s largest economy. Economists had expected a fall.
Eurozone inflation has moderated lately – falling from 2.7 per cent in June to 2.5 per cent in July – suggesting underlying cost pressures are also abating. But economists have warned that inflation could accelerate again this year. Even the latest rate remains significantly above the ECB’s target of an annual rate “below but close” to 2 per cent.
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