The ECB breaks its self-imposed rules

CHRISTINE LAGARDE took over as the president of the European Central Bank (ECB) in November intent on peacemaking. The bank’s negative interest rates and bond-buying were reviled in the euro area’s northern countries. In order to heal the rift Ms Lagarde launched a year-long review of the ECB’s strategy. Few investors expected policy to change much in 2020.

Covid-19 upended all that. On March 18th the ECB announced an emergency asset-purchase scheme that would buy €750bn ($809bn) in government and corporate bonds. With its existing programmes, the bank will hoover up over €1trn in assets this year—equivalent to 9% of euro-area GDP. But even this might not be enough to gin up the economy.

The severity of the pandemic means that the ECB has been bolder and considerably more flexible than economists would have thought possible a few months ago, says Piet Christiansen of Danske Bank. In large part that is because the ECB is amending some of the rules that have until now governed its asset purchases.

One self-imposed rule concerns the composition of purchases. The ECB generally tries to buy government bonds in proportion to the capital each member state puts into it (or its “capital key”), which is roughly in line with the size of its economy. This time the bank will be more flexible. It could, for example, buy more...



via The Economist: Finance and economics Business Feeds

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