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ECB Says OMT Is Legal as Necessary Tool in Special Times

The European Central Bank said its new bond purchasing program is legal under its founding rules as it helps achieve the primary mandate of ensuring price stability and it will not be used to print money.

Outright Monetary Transactions “are a non-standard, but necessary, monetary policy instrument in the current exceptional circumstances in financial markets,” the ECB said in an article in its monthly report published today examining the legality of the new plan.

“The use of outright purchases of bonds as a monetary policy tool is expressly provided for in Article 18.1 of the Statute” of the European System of Central Banks, the ECB said.

The ECB has come under fire in Germany, with the Bundesbank saying the bond plan compromises the central bank’s independence and comes close to violating a ban on the central bank financing governments.

The ECB said it will “under no circumstances” allow OMTs to be used to print money and thereby not breaching Article 123 of its founding treaty, which prohibits the purchase of government bonds in the primary market.

The ECB will only purchase government bonds in the secondary market, if governments sign up to strict conditionality. The tool “will only be used to the extent necessary to achieve the objective of maintaining price stability,” it said in today’s report.

Officials have devised “specific operational modalities” to ensure the OMT does not interfere with the objectives of the monetary financing prohibition, the ECB said.

“A major concern has been the need to ensure that this monetary policy instrument could not ultimately weaken fiscal discipline,” according to the report.

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