Rate hike could stop ECB buying bonds

THE European Central Bank could be forced to slam the brakes on its sovereign bond-buying programme due to its intention to put up interest rates, according to economists.

ING’s Peter Vanden Houte says tightening monetary policy is “at odds” with bond purchases because higher rates will push investors into other asset classes, raising yields on bonds and further eroding the value of the ECB’s considerable stock of bonds.

“Increases in official interest rates would likely push up peripheral bond yields further, thereby saddling the ECB’s balance sheet with additional capital losses,” he says.

The Bank is therefore likely to push hard for the Eurozone’s bailout fund to take over bond purchases. “The ECB is probably thinking it has done enough to appease the tensions within the monetary union,” says Vanden Houte.

The ECB has been buying sovereign bonds on the secondary market in peripheral Eurozone countries in order to bring their yields down.

An end to its interventions would turn up the pressure on the region’s leaders to come up with a solution to the debt crisis.