ECB president Mario Draghi opens door to expanding bond buy-back scheme

European Central Bank chief Mario Draghi has opened the door to an increase in the “size, composition and duration” of the bank’s €1.1 trillion bond-buying programme.

As the ECB eased its growth and inflation forecasts, Mr Draghi noted upheavals in China and said quantitative easing will continue until the projected end of the programme in September 2016 “or beyond, if necessary”.

The admission that the contentious plan might have to be expanded marks a lack of acceleration in the recovery of the European economy and the vulnerability of the global economy to the Chinese slowdown.

Amid market ructions in China, the Beijing authorities devalued the yuan in a two- step manoeuvre last month.

“The information available indicates a continued, though somewhat weaker, economic recovery and a slower increase in inflation rates compared with earlier expectations,” Mr Draghi told reporters in Frankfurt.

New forecast

The ECB’s new forecast points to 1.4 per cent growth in euro zone GDP this year, down from its previous 1.5 per cent projection. The 2017 forecast was trimmed to 1.8 per cent from 2 per cent, cuts Mr Draghi attributed to weaker external demand.

The euro fell 1 per cent against the dollar and global stock markets rallied on foot of the ECB chief’s remarks, which came as the bank governors kept interest rates steady at a record low.

Oil prices rose and there was a weakening in sovereign bond yields, which move in the opposite direction to price.

“There aren’t special limits to the possibilities that the ECB has in gearing up monetary policy,” Mr Draghi said.

“The risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties related to the external environment.”

Irish bonds

The European Central Bank moved at the start of this year to start buying €60 billion per month in euro zone government bonds, Irish bonds among them.

While Mr Draghi said none of the ECB governors had argued to add to the quantitative easing programme now, they tweaked the scheme by raising the share of bonds the bank can buy to 33 per cent of each issue from 25 per cent.

The move is seen a precursor to other modifications if there is no improvement in the economic outlook.

“This means that the ECB will be able to purchase more of each individual bond issue than they could previously, and should be interpreted as the first sign that they might potentially increase QE in the future, as these limits were one potential problem in increasing the programme,” said Garret Grogan, head of long-term interest rate trading at Bank of Ireland.

“Initial reaction to this move was a weakening of the euro exchange rate against its peer currencies, and if euro zone QE was to be expanded this would further devalue the euro which would further boost European export growth.”