Tuesday 30 August 2016

ECB launches bond-buying in bid to kick-start lending

Gavin Jones

Published 03/10/2014 | 02:30

President of European Central Bank Mario Draghi walks in front of the ECB governing council prior to their meeting in Naples, Italy
President of European Central Bank Mario Draghi walks in front of the ECB governing council prior to their meeting in Naples, Italy

The European Central Bank (ECB) will buy bundles of mortgages, business loans and other forms of secured debt from the middle of this month in an attempt to kick start the Eurozone economy by making it cheaper to borrow.

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The move comes despite misgivings in Germany and elsewhere.

After cutting interest rates last month to what it said was "the lower bound", the ECB left its main refinancing rate at 0.05pc yesterday.

President Mario Draghi said the ECB would begin to buy covered bonds, a form of secured debt created by pooling mortgages together, from banks in mid-October and that it will purchase asset-backed securities (ABS) - bundled loans - at some point in the fourth quarter of the year.

It hopes the programme, which will last for at least two years, will boost credit by making money cheaper for banks and making the banks themselves more confident about lending, especially to the small and medium-sized enterprises (SMEs).

"As all our measures work their way through to the economy, they will contribute to a return of inflation rates to levels closer to our aim," Mr Draghi said a news conference yesterday in Naples.

If there was any doubt as to what is at stake, the ECB policymakers met in an 18th-century former royal palace which was thronged by hundreds of protesters chanting slogans and marching behind a large banner reading: "Job insecurity, poverty, unemployment, speculation. Free us from the ECB!"

Mr Draghi said the intention was to pump money into the economy by expanding the ECB's balance sheet back to the sort of level it was in early 2012, which would mean adding hundreds of billions of euros - a big task.

A Reuters poll on Monday showed money market traders on average expect the ECB to buy a total of €200bn of ABS and covered bonds over a year.

A separate scheme to boost lending by offering banks up to €400bn of cheap four-year loans attracted a disappointing initial take-up last month.

Market expectations that the ECB will launch a broad-based quantitative easing (QE) scheme have shot up in recent months as the bloc teeters on the edge of deflation.

Mr Draghi said the ECB council was unanimous in agreeing to take further steps if it needed to - commonly accepted as code for QE. But that ultimate move remains a difficult one for the ECB to take, given stiff internal opposition.

The euro gained against the dollar, while Eurozone bond yields rose as the ECB chief gave no hints of an imminent sovereign bond buying program.

Mr Draghi faces opposition on a number of fronts.

German central bank chief Jens Weidmann has voiced doubts about the ABS purchase plan and his predecessor, Axel Weber, who resigned over an earlier ECB bond-buying program, was strongly opposed.

Irish Independent

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