What can one read into the fact that the European Central Bank suspended its purchases of (mostly peripheral) eurozone government bonds last week?
The ECB said its government bond purchase programme – launched last year as part of European Union efforts to stabilise the euro – was halted last week for the first time since October. Weekly purchases had hit almost €3bn late last year.
Mr Trichet insisted that ECB monetary policy is detached from crisis-fighting moves. However, financial markets would be unlikely to take seriously a threat to raise interest rates if the ECB was still intervening heavily in markets.
… however, the ECB is taking a noticeably harder stance than other central banks because it is worried that a temporary “hump” in inflation could become longer-lasting if it resulted in “second round effects”, for instance through higher wages. ECB policymakers have warned over the past week against relying on measures of “core” inflation, which exclude energy and food prices.
While no one should underestimate Trichet’s determination to stop inflation spiralling out of control, it also seems likely the ECB president, who has lobbied hard for a new eurozone rescue mechanism, is also sending a message ahead of Friday’s EU summit.
Whether Europe’s leaders take the hint and get their act together is, of course, another matter entirely, observes Gary Jenkins of Evolution Securities:
Whilst the absence of the ECB from the market might indicate that the European sovereign crisis has ended that would not be my interpretation. It was much quieter and calmer in peripheral sovereign land than it has been of late, but nonetheless Portuguese, Greek, Irish and Spanish 10 year bond yields all crept upwards over the week. Much will depend upon the news coming out of the EU leaders summit on Friday. Do they believe that the problems have been dealt with and leave everything as is, in which case the market could be disappointed, as it is expecting some kind of change to the EFSF as a minimum, or do they look to undertake drastic action in order to try and convince investors that the situation has been dealt with. If I was a betting man I would place my money on slight change to the EFSF but overall the strategy of kicking the can down the road and praying to continue.