The ECB should bring back the “sterilization” in the fight against fragmentation

The ECB is reportedly considering a new bond-buying program to cap yields/spreads in the fight against fragmentation, Reuters sources say. And in order to move forward with that and avoid a contradictory decision (where it has to raise borrowing costs in the eurozone as a whole while limiting that for some members of the periphery), the central bank would consider pairing the diet with ‘sterilization’ – as they did a decade ago.

This would see the ECB hold auctions so banks can park cash at the central bank at a more favorable interest rate, sources noting that this could depend on the rate of the refinancing operation. This would lead to an outflow of cash from the financial system to offset bond purchases to cap yields/spreads, i.e. ‘sterilization’.

The details are still said to be ironed out at the moment, but policymakers aim to unveil the new regime at the next policy meeting on July 21.

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