Price stability key to ECB bond buys?

August 8, 2011

Price stability remains the only needle in the compass for the European Central Bank, even when it is buying government bonds, the 17-country bloc’s central bank strived to argue on Sunday.

ECB President Jean-Claude Trichet said, in the statement announcing extension of its bond-buying programme, that the decision was made to keep inflation at an acceptable level.

“This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area,” Trichet said.

Analysts had pegged the decision to trying to salvage Spain and Italy from being in markets’ crosshairs and some likened it to quantitative easing policies conducted in the United States, Britain and elsewhere.

Granted, Italy and Spain being dragged down could have created a chance of deflation in the euro zone, which of course would mean undershooting the central bank’s target of annual inflation of just under 2 percent.

But just last Thursday, the ECB said inflation risks are on the upside. It has already raised interest rates twice this year to quell inflation, which has topped its target for eight months running. No matter, the programme is needed for price stability, Trichet said – an explanation used for pretty much everything the ECB does.

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