The European Central Bank will mop up the liquidity created through buying government bonds primarily by taking term deposits, president Jean-Claude Trichet said in an interview published today.
Mr Trichet said in an interview with German business daily Handelsblatt that the ECB was not embarking on quantitative easing with its purchases and would not push up inflation.
"We are not changing our monetary policy stance. We are not embarking on quantitative easing. We will withdraw the liquidity that we will inject mainly through tendering term deposits," he said. "The governing council will not tolerate inflation."
ECB governing council member Axel Weber said earlier this week he was critical of the decision because it posed risks to inflation, and executive board member Juergen Stark said he shared the concerns although the ECB would prevent inflation pressures emerging by mopping up excess liquidity.
The ECB is expected to unveil details next week of how it plans to sterilise the bond purchases, which began on Monday.
Mr Trichet denied government budget cuts jeopardised the economic recovery in the 16 member euro zone.
"It is a complete fallacy to say that fiscal soundness dampens growth. It is exactly the contrary," he said.
"It is the absence of fiscal credibility which dampens growth. Medium term sound and credible fiscal policies are a major prerequisite for confidence. And confidence of the households, confidence of the entrepreneurs and confidence of the investors is what is indispensable for the recovery."
Reuters