Back to ‘whatever it takes’? Five reasons for doubt

 Uncomfortable realities behind ECB’s dilemma over fragmentation and inflation

Behind the scenes, spectre of losses for central banks – and for taxpayers

The European Central Bank’s complex planning for an anti-fragmentation facility for euro area unity could backfire – by exposing rather than alleviating long-standing sources of fracture.

The ECB’s uneven communications over efforts to limit renewed bond market flare-ups and harmonise its ‘monetary transmission’ demonstrate an uncomfortable dilemma. The ECB and national central banks have been deliberating internally for at least three months a necessary fragmentation-prevention tool to accompany slow normalisation of European interest rates in response to rocketing inflation partly caused by the Russian invasion of Ukraine.

But a combination of political, legal and technical imponderables has prevented any decision. The governing council is leaning in the direction of ‘constructive ambiguity’ articulated by Joachim Nagel, the new Bundesbank chief, a jovial but plain-speaking anti-inflation activist who has adopted an ‘iron fist in velvet glove’ approach since taking over in January.

Buying bonds with interest rates rising could lose central banks money

One big problem, barely noticed by the public and financial markets, is that a new ECB bond market purchase programme at a time of rising interest rates could expose euro area central banks to large losses on their balance sheets. This could represent political dynamite, especially in Germany, where the Bundesbank habitually has a sizeable (now likely to be growing) lead in citizens’ trust over the ECB, according to polling data.

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