Belgium, (Brussels Morning Newspaper) The European Central Bank (ECB) is preparing a scheme to offset bond purchases by draining cash from the banking system, according to two sources.
Since the central bank announced plans to stop buying member states’ debt and start upping interest rates, bond yields of indebted EU countries started to rise quickly, Reuters reports on Tuesday.
The ECB’s announcements are aimed at curbing inflation, which has well exceeded the central bank’s target of 2% and continues to rise.
The ECB has been working on a new bond-buying scheme to limit the spread between bond yields of severely indebted EU member states and stronger economies in the bloc.
The body will have to up borrowing costs for the eurozone, but cap yields for weaker EU member states.
According to the sources, the ECB is planning to couple its new bond purchasing scheme with auctions that would allow banks to hold cash at the ECB at more favourable terms than deposits.
The move is similar to the one ECB made about a decade ago, but this time the banking system has more leeway as the central bank created excess reserves in the system of nearly 4.5 trillion euro over the last ten years or so.
Ignazio Visco, Governor of the Bank of Italy, noted earlier this month that the ECB could focus on interest rates rather than selling bonds, suggesting that the central bank could opt for a move similar to the one sources announced.
Plan acceptable to strong economies
The solution would be more acceptable to strong EU economies like Germany than selling bonds from such countries as it would not cause losses for the national central bank.
The ECB previously announced plans to present the new scheme at the Governing Council meeting slated for July, stressing that it will be aimed at limiting the spread between bond yields in the EU.
While the body has not prepared the scheme, announcements suggest that it will come with requirements for beneficiaries, including compliance with the European Commission’s economic recommendations.