Tags: ECB | Bond | Yield | Target

ECB May Set Bond Yield Target, but Keep It Quiet

Thursday, 23 Aug 2012 11:58 AM

 

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The European Central Bank is considering setting a yield target on purchases under a new bond-buying plan but without making the levels public, central bank sources told Reuters on Thursday.

Such an "implicit target" was one option being examined but nothing would be decided before the ECB's (explain this) Sept. 6 policy meeting, one source said. Such a target could be flexible.

Another said nothing would be decided before that meeting, but would not rule out this possibility.

ECB President Mario Draghi signaled earlier this month that the bank may start buying government debt to reduce crippling Spanish and Italian borrowing costs, comments that fuelled a broad-based upturn in sentiment on global markets.

Setting a specific, known, yield target could open up the ECB to a political debate with governments over the appropriate level to aim at, something the bank would want to avoid, said Christian Schulz, a former ECB economist now at Berenberg Bank.

But not making the target public could also be problematic.

"That's an invitation to markets to do what you don't what them to do, which is sell, sell, sell to see where you would intervene," said Schulz. "We think that an explicit, clear, open target would be extremely helpful. The Swiss experience shows that if you don't announce a clear target, markets are likely to test where the target is."

Financial markets tested the Swiss National Bank's resolve and pushed the Swiss franc higher last year until the SNB shocked them by setting an exchange rate cap on the currency to stave off a recession (explain this).

The ECB is being forced to take a greater role in fighting the eurozone crisis while governments negotiate legal and political hurdles to coordinating a longer-term response, though Germany's Bundesbank wants to limit central bank action.

The powerful Bundesbank, the central bank of Europe's largest economy, objects to Draghi's plan to resume buying bonds on the grounds that this amounts to monetary financing of governments, contravening European law.

The Bundesbank stepped up its resistance to Draghi's plans on Monday.

However, German Chancellor Angela Merkel voiced support for the ECB's crisis-fighting strategy last week.

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.

Behind-The-Scenes Wrangling

Policymakers are posturing over the program ahead of an ECB meeting on Sept. 6, at which markets will be looking for the central bank to spell out more details of the plan.

Draghi said after the ECB's last policy meeting on Aug. 2 that any bond-buying intervention would only come if governments requested eurozone aid first. That in turn would be linked to conditions.

While Draghi also singled out Bundesbank chief Jens Weidmann as the only ECB policymaker to register reservations against the bond-buying proposals at the Aug. 2 meeting, another policymaker has since hinted that the ECB divisions may not be so clear cut.

"No-one should try to give the impression that the Bundesbank or its president is isolated," ECB Executive Board member Joerg Asmussen said in a newspaper published on Monday, adding that he and Weidmann worked closely together and trusted each other.

German newspaper Die Welt, citing several sources familiar with the discussions, said on Thursday that at least some central bankers favor setting a spread rather than a yield target, meaning the ECB would set an internal target as to how much higher the interest rates on peripheral debt could be relative to the benchmark German paper rather than fixing an interest rate ceiling.

The ECB has said that it is misleading to report on decisions which have not yet been taken.

© 2014 Thomson/Reuters. All rights reserved.

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