ECB announces asset purchase programme

Making good on his promise to do whatever it takes to support the euro, last Thursday European Central Bank president Mario Draghi announced a new asset purchase programme, dubbed Outright Monetary Transactions or OMTs.

The new programme means that the ECB will buy bonds of distressed countries, under strict conditions, with maturities between one and three years.

Mr Draghi said that no limit will be set on the size of OMTs. On the issue of seniority of ECB bond holdings, whereby existing bondholders were concerned that, in case of default, the ECB would be the first to be reimbursed before other creditors, Draghi clarified that the ECB accepts the same treatment as private creditors.

Meanwhile, in a sign of a substantial ease in the downturn of the UK manufacturing sector, manufacturing in the UK rebounded in August from the prior month as the Purchasing Manager’s Index rose to 49.5 from 45.2 in July. The rebound was faster than expected and took the index close to the 50 mark that separates expansion from contraction. Economists had forecast the index to rise to 46.3.

In the anxiously awaited speech by the US Federal Reserve chairman Ben Bernanke at Jackson Hole, Mr Bernanke defended the effectiveness of unconventional monetary policies, leaving the door wide open for a third round of quantitative easing, should the economy, especially the employment situation, show no significant improvement. It would appear, therefore, that another dose of QE seems just a matter of time.

Stock markets reacted positively to Mr Bernanke’s comments while the dollar lost ground.

Later in the week, the Institute for Supply Management’s factory index came in at 49.6 in August. This is the lowest level since July 2009, and down from 49.8 in July. Economists in the Bloomberg survey predicted an August reading of 50.

This article was complied by Bank of Valletta for general information purposes only.


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