Whether you want to call it quantitative easing, credit easing, printing money or “enhanced credit support” as Jean Claude Trichet prefers, the ECB yesterday took a step in that direction. At the post rate decision press conference, Trichet announced that they had agreed in principle to purchase up to €60bn of euro-denominated covered bonds, which is roughly 10% of the public market. He said that they had decided on covered bonds as that market has been particularly badly affected by the “financial turbulence”. The announcement is good news for banks in Germany, France and Spain as they are the heaviest users of these instruments (a blog with a bit more detail on covered bonds is on its way). Regardless of how you label it, a foray into the credit markets is a clear signal that the opinions of the doves are becoming increasingly influential.
Trichet also announced a 25bp cut in the key rate to 1% and emphasised that it had not been decided that 1% was their floor. We were told that the current 6 month maturity on the loans offered to banks would be increased to a year and that the European Investment Bank (EIB) would be permitted to participate in the ECB’s re-financing operations from the 8th July. I find this a particularly clever manoeuvre as it potentially transfers the decision of which firms to lend to from the ECB to the EIB, and any criticism that may come with further interventions in debt markets.
Trichet made clear that all the decisions were made unanimously, a step no doubt designed as a show of unity after the recent bickering which came to a head with him asking members not to comment publicly on non-standard measures (see previous blog). Even though the argument appears to be swinging a little in favour of the doves it is clear the hawks are still strongly defending their corner. The weak first quarter economic data may have led one to think that more substantial policy may have been announced, I’m sure if the economy continues to weaken we will be seeing the doves in the ascendance and the hawks marginalised.