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Defiant ECB Pledges Full Commitment After German Ruling on QE
The European Central Bank responded to a German court ruling criticizing its long-standing bond-buying program by pledging to continue doing everything necessary to revive inflation. After an evening conference call to discuss the surprise decision by Germany’s constitutional court, the Governing Council said it took note of the judgment. But it also pointedly remarked that the top European court has previously said quantitative easing is legal.
“The Governing Council remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area.”
The ECB was given three months to prove that its asset-purchase program, which has bought 2.7 trillion euros ($2.9 trillion) of debt since 2015 and is adding more each month, is in line with the law.
Tuesday’s ruling won’t stop purchases immediately and it doesn’t affect a separate 750 billion-euro plan launched in March to combat the coronavirus crisis. It does, however, raise question marks over just how far the ECB can push its monetary stimulus. The decision is a “legal bombshell,” said Holger Schmieding, chief economist at Berenberg. “Whether the German constitutional court’s restrictions have an impact on market perceptions as to how effective the ECB can respond to the current economic emergency remains an open question.”
The initial response of investors was shock – the euro slid and bond yields fluctuated before rising in stressed economies such as Italy. The single currency remained lower after the ECB statement, trading down 0.5% at $1.0849. The lawsuit was filed by a group of businessmen and academics, frequent critics of the EU who argued that the ECB is improperly conducting economic policy instead of just monetary policy. A key concern is whether sovereign-bond purchases break EU law banning direct financing of governments.
German Finance Minister Olaf Scholz played down the judgment, saying the court “clearly ruled” that QE isn’t monetary financing and the program complies with the German constitution.
He also said it shows the need to “further deepen and intensify European cooperation” – implicitly acknowledging the burden the ECB has taken on as governments struggle to agree on joint fiscal stimulus to tackle the coronavirus.
That’s a risk for the currency bloc. The ruling could have excluded the Bundesbank from the asset purchase program, which is running at 20 billion euros a month with an additional 120 billion euros as part of measures to combat the current downturn. With Germany the euro zone’s biggest economy, its central bank accounts for the biggest share of purchases.
https://www.msn.com/en-us/money/markets/defiant-ecb-pledges-full-commitment-after-german-ruling-on-qe/ar-BB13DJDY
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