THE European Central Bank (ECB) could play a bigger role in fighting the Eurozone sovereign debt crisis through more rate cuts, bond purchases and further liquidity provision, the International Monetary Fund (IMF) said in a regular report yesterday on the Eurozone.
The IMF also said that the independent ECB, which is legally forbidden to finance governments, could be given full lender-of-last-resort functions, to help break the vicious circle of highly indebted governments borrowing from banks which in turn become vulnerable due to the risk associated with the bonds. “These could include policies to support demand in the short run and fend off downside risks to inflation, as well as measures to ensure that monetary transmission, currently impaired by financial stress in some countries,” the IMF said.
The IMF said the ECB could further lower borrowing costs, which are currently at a record low of 0.75 percent, because the economy was weak and inflation risks small.
The bank could try quantitative easing (QE) with “sizable” sovereign bond purchases, preannounced over a given period of time, the IMF said. “Buying a representative portfolio of long-term government bonds -- for example, defined equitably across the euro area by GDP weights -- would also provide a measure of added stability to stressed sovereign markets,” it added.
City A.M. Reporter