ECB governor defends bank against inflation charge

(BERLIN) - The European Central Bank's anti-crisis measures are not fuelling inflation, a top ECB governor assured on Tuesday, rejecting recent criticism to that effect in Germany.

ECB governing council member and Luxembourg central bank chief Yves Mersch said the criticism from leading German economic think-tanks -- that a controversial bond purchase programme posed an inflation risk for the 17 countries that share the euro -- was "unjustified".

Indeed, the programme, known as OMT or Outright Monetary Transactions, would actually act as a "bulwark" against the "destructive" forces on the financial markets that are "threatening to jeopardise price stability in the single currency area", Mersch said in a speech to an engineering conference here.

Two weeks ago, Germany's leading economic institutes -- Ifo in Munich, IfW in Kiel, IW in Halle and RWI in Essen -- warned of a "risk of a mid-term rise in inflation" as a direct result of the ECB's OMT programme.

The programme, as well as its predecessor the Securities Market Programme (SMP), has come under heavy fire in Germany as being a covert way for the central bank to pay off countries' debt by simply printing money.

"In the longer term there is a great danger that the ECB will continue to purchase bonds and provide excessive monetary policy stimulation ... which could drive up prices and lead to an increase in inflation expectations," the institutes warned.

But Mersch rejected the institutes' objections, arguing that the OMTs had been conceived in such a way that they would not fuel inflation either in the short or medium term.

The bond purchases would be neutralised or "sterilised", meaning that the ECB will take as much money out of circulation as is pumped into the system via the purchases. That meant the money supply would not be inflated by the programme.

Furthermore, the ECB will buy only bonds at a shorter end of the interest rate curve, namely debt maturing between one and three years.

"That means that the ECB will be able to retain control over the liquidity created via the OMTs at all times," Mersch said.

Mersch has been nominated for a seat on the ECB's six-strong executive board, which is responsible for the day-to-day running of the central bank.

But his nomination has run into resistance, with the European Parliament's economic affairs committee Monday calling on the European Council to withdraw his candidacy and propose a woman instead.