Friday, 23 June 2017

Governments must brace for end of ECB’s bond buying, Praet says

In World Economy News 23/06/2017

The European Central Bank will ignore government complains about rising borrowing costs when it eventually tightens policy and will not help any particular country, the ECB’s chief economist said, according to the German magazine Spiegel.
Countries on the periphery of the 19-member euro zone worry that when the ECB ends its 2.3 trillion-euro (2.03 trillion pounds) bond-buying scheme, yields will rise. The higher financing costs could curb growth and would disproportionately hurt indebted countries such as Italy, Spain or Portugal.
“If the spreads for a particular country rise, that’s not a monetary policy problem,” ECB Chief Economist Peter Praet said in an interview published in Spiegel on Thursday. “We are not singling out particular countries and neither are we there to ensure governments have favourable financing conditions.”
The ECB gave up its bias towards more rates cuts earlier this month in a small step towards normalisation. It will decide this autumn whether to extend or wind down its bond buying.
“When the day comes, we will look at inflation and act accordingly, regardless of whether governments complain,” Praet said. “We forewarned them and they clearly understood that.
“I have just read a commentary by the Italian Minister of Economy and Finance, Pier Carlo Padoan. ‘When the bond purchases come to an end, we are on our own’, he writes. And he’s right,” Praet said.
The bond purchase scheme is set to run until the end of the year, but even if the programme is wound down, it would be reduced over a period several months.
Although many market analysts expect another extension of the programme, the scarcity of government debt to buy could limit the ECB’s ability to continue buying.

Source: Reuters (Reporting by Balazs Koranyi; Editing by Maria Sheahan, Larry King)