Although one of the ECB’s monetary policy instruments since 1999, outright purchases remained unused until June 2009 (when the ECB started its first covered bond purchase programme) and can therefore be regarded as a non-standard measure. In May 2010, the ECB decided to start the Securities Markets Programme (SMP) in order to address tensions in certain market segments that hampered the monetary policy transmission mechanism. The latter refers to the process with which the ECB aims to influence prices in the entire euro area via its interest rates. Under the SMP, should this mechanism be disrupted by dysfunctional market segments and the ECB’s rate signal not be transmitted evenly to all parts of the euro area, the ECB could intervene by buying, on the secondary market (i.e. from banks and against market prices), the securities that it normally accepts as collateral. The last SMP purchases took place in February 2012 and the programme was terminated in September 2012.
Having announced in August 2012 the possibility of Outright Monetary Transactions (OMTs) in secondary sovereign bond markets to safeguard an appropriate monetary policy transmission and the singleness of the monetary policy, the ECB went on to announce the technical features of the OMTs in September 2012.
The objectives of OMTs are to safeguard an appropriate monetary policy transmission mechanism and to preserve the singleness of the monetary policy across the euro area by providing a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. In contrast to the SMP, a necessary condition for OMTs is strict and effective conditionality attached to an appropriate EFSF/ESM programme in order to preserve the primacy of the ECB’s price stability mandate and to ensure that governments retain the right incentive to implement required fiscal adjustments and structural reforms. A further difference to the SMP is that OMTs are ex ante unlimited and would take place in secondary government bond markets with maturities of one to three years. Finally, the ECB will accept the same (pari passu) treatment as private or other creditors for all of its OMT holdings. It needs to be stressed that the ECB would exit from OMTs once their objectives have been achieved or when there is a failure to comply with a programme.
As was the case with the SMP, the liquidity created through OMTs will be fully sterilised. This means that the total additional liquidity injected through OMTs up to a certain week is absorbed from the market in the following week. The sterilisation of liquidity can for example be executed through an offer of fixed-term deposits that banks can make in the central bank. The net effect of purchases and sterilisation on the overall liquidity in the interbank money market is thus neutral.
MP.011 01/13European Central Bank