Bond purchases on hold, but other measures possible

We expect the ECB to disappoint markets this week with its plans for peripheral government bond purchases. President Mario Draghi is likely to state that such purchases will be limited and that they will not begin until after the EFSF or ESM have bought bonds themselves. He will probably also eschew calls for the ECB to set an explicit cap on peripheral bond spreads. But with the region’s core countries now following the periphery into recession, the Bank might adopt further measures to support the broader economy. An interest rate cut cannot be ruled out, albeit perhaps not this month, and the ECB might outline plans to get the liquidity that it has provided to commercial banks into the hands of firms and households.