To avoid stoking inflation, the ECB may opt to neutralise bond purchases under its new crisis-fighting facility.
Bond purchases by the ECB through any new instruments are likely to involve selling other securities in its portfolio so the purchases do not undermine efforts to tame record inflation, according to people quoted in the press.
People familiar with the situation said policymakers were determined to neutralise any intervention in the bond market so as not to exacerbate upward pressure on prices.
Officials hope to complete work on the new tools, which will continue for some time and could change in design, by the July 20-21 policy meeting, when interest rates will rise by 25 basis points, they said.
Countries that benefit must meet certain conditions to avoid fears that the ECB is funding governments directly.
The ECB’s governing council held an emergency meeting on Wednesday to speed up the development of the new facility after a sell-off in Italian debt stoked fears of a repeat of Europe’s sovereign debt crisis.While renewed efforts to address so-called balkanisation have calmed markets to some extent, they have stoked expectations of concrete announcements about the new tool in the coming weeks.
The ECB also reiterated that it would be more flexible in reinvesting maturing debt under its emergency Anti-pandemic bond purchase programme (PEPP).
The ECB estimates about 17 billion euros ($17.7 billion) of bonds mature each month, including 12 billion euros in core countries, according to people familiar with the matter.Putting that money back into troubled markets could form a defensive measure and provide temporary relief.
Flexibility could also involve upfront reinvestment, meaning the ECB could buy new bonds before the old ones mature, people familiar with the matter said.
Italian bond yields have fallen sharply so far, with the spread between Italian 10-year bonds and German bunds, a key risk indicator for the eurozone, falling 20 basis points to 197 basis points.