The European Court of Justice (ECJ) has ruled that the European Central Bank’s bond-buying programme is legal, once certain conditions are met.
The conditions identified by the court’s advocate general include an assurance that the ECB does not provide “direct” financial assistance when it buys the debt issued by a euro zone member state.
The ruling states that “direct involvement in the financial assistance programme that applies to the State concerned”.
Essentially that means that OMT can be used to drive down the borrowing costs of a country by buying bonds but the bank can’t fund a bailout.
The pressure for OMT policy action has been intense as falling oil prices pulled consumer prices into negative territory across the euro zone last month.
The impact was also clear in the UK this week where inflation halved to just 0.5pc in December, the lowest in over 14 years. That only reinforced market expectations the Bank of England would not be able to hike rates until 2016 at the earliest
Likewise, investors are wagering the Federal Reserve will find it hard to start tightening in the middle of the year, as some policy members have suggested.
In just the past three weeks, Fed fund futures have priced out 25 basis points of hikes for this year and now see just one move to 0.5 percent by Christmas.
The risk of low inflation for longer has in turn pulled down bond yields globally, with five-year debt in Germany and Japan now paying nothing at all.
One side effect of plunging bond yields is to make gold more attractive as an alternative investment.
Since gold does not pay a return, an opportunity cost for holding it is the yield forgone on safe-haven bonds. Now, that cost has diminished to the point where buying gold offers the same return as lending money to Germany for five years.
The yellow metal was steady around $1,231.60 an ounce after touching a three-month peak.
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