According to reports, the European Central Bank (ECB) will likely drain cash from the banking system. This is to offset any bond purchases made to cap borrowing costs for indebted euro zone states.
The ECB unveiled plans to stop buying debt and raise its interest rates for the first time in over a decade next month to fight runaway inflation. This is after the bond yields for Italy and other debt-laden countries had surged.
The market turmoil has forced ECB to devise a plan on new bond-buying scheme to curb yields. This leaves it in the difficult position of raising borrowing costs for the euro zone as a whole, while at the same time capping them for some of its weaker members.
It was gathered that the ECB is considering pairing the new bond-purchase scheme with auctions at which banks can park cash at the ECB. This is to give more favourable interest rate than the ordinary rate on deposits.
This would allow the ECB to ‘sterilise’ the bond purchases under the new scheme, in a repeat of its weekly “liquidity-absorbing” operations of a decade ago. These offered banks an interest rate up to that of the ECB’s refinancing operation, then 0.25%.
The planned solution would also be more convenient than selling bonds from countries where borrowing costs are lower, such as Germany, as this would likely cause losses for the local central bank.
