- Christian Schulz, Berenberg bank economist
European Central Bank Vice President Vitor Constancio said that the central bank is set to purchase government bonds early next year should policy makers ponder that more decisive measures are needed. The ECB is already buying covered bonds and bundled loans known as asset-backed securities. The central bank aims to expand the size of its balance sheet to the levels of early 2012, meaning around 1 trillion euros higher than it is today. If the ECB purchases sovereign debt, using the capital key, it means German bunds would be the main target. Roughly 18% of any money spent would go on German Bunds, 14% on French bonds and 12% and 8% on Italian and Spanish paper, respectively. Nevertheless, the ECB's Governing Council is split on either the need for further stimulus or the design of purchases. Bundesbank President Jens Weidmann said on November 24 that there are "high legal hurdles" to buying government debt.
Constancio's comments came days after ECB President Mario Draghi informed financial markets that the ECB was losing patience with the extremely low levels of inflation and was ready to do more. Annual Euro zone inflation came in at 0.4% in October, far below the ECB's goal of just below 2%. Many analysts forecast inflation to slow to 0.3% in November, with the official data due on November 28.
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