ECB Surprises the Market by Agreeing to Purchase Covered Bonds
The European Cental Bank (ECB) once again eased policy, albeit begrudgingly, cutting interest rates to 1%, leaving the deposit rate at 0.25%. In addition, they left the door open to another cut to 0.75%, extended their repo facility to 1 year from 6 months and most surprisingly agreed to purchase 60 billion Euros of covered bonds. At first blush, this would appear to be a defeat for the Bundesbank hawks led by Axel Weber. On closer inspection, however, it now appears that despite having 26 members on the Governing Council, the ECB is being run for the benefit of Germany. The bonds they are buying are heavily represented by Pfandbriefs issued by German financial institutions. This purchase of bonds will help them. Moreover, unlike quantitative easing which pushes up the supply of money, Trichet has indicated that the proposed purchase of bonds will be sterlized. In which case, no monetary easing is being accomplished, just a support of credit markets.
Filed under: Fixed Income, Macro Policy, quantitative easing
