Thursday, September 4, 2014

ECB to embark on QE by buying ABS, covered bonds

    The European Central Bank (ECB), which earlier today cut its benchmark refinancing rate to effectively zero, will also embark on quantitative easing in October by purchasing a broad portfolio of asset-backed securities (ABSs) and euro-denominated covered bonds to boost the flow of credit to the real economy.
     ECB President Mario Draghi said the new measures - taken only four months after the ECB decided to launch up to 400 billion euros in targeted longer-term refinancing operations (LTROs) in September and December - reflected the overall subdued outlook for inflation and a weakening of the euro area's growth momentum, and aimed at anchoring inflation expectations around 2 percent.
     Inflation in the euro zone fell further to 0.3 percent in August, the weakest rate since October 2009, and way below the ECB's target for inflation that is just below 2.0 percent. And economic growth in the second quarter stagnated from the first quarter.
    The sharp burst of stimulus should help boost inflation, but the ECB may still go further if needed.
    "Should it become necessary to further address risks of too prolonged period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate," Draghi said.

    Underscoring the weak outlook for the 18-nation euro area, ECB staff revised downwards its forecast for growth this year to 0.9 percent from 1.0 percent forecast in June and the 2015 forecast to 1.6 percent from 1.7 percent. The forecast for 2016 growth was revised upwards to 1.9 percent from 1.8 percent.
    ECB staff also revised downwards its forecast for inflation this year with inflation seen at 0.6 percent, down from June's forecast of 0.7 percent. The forecast for 2015 inflation at 1.1 percent and 2016 at 1.4 percent were unchanged.
    Draghi said the risks to the economic outlook remain to the downside, with the loss of economic momentum possibly dampening private investment along with the heightened geopolitical risks that could undermine business and consumer confidence.
    The ECB's new plan to purchase non-financial private sector assets will kick off in October, with the volume of purchases and how big an impact it will have on the ECB's balance sheet to be decided by the ECB council on Oct. 2.


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