ECB to start bond-buying programme next week

European Central Bank revises growth forecast upwards

The European Central Bank will launch into quantitative easing next week having increased its economic growth forecasts for this year and next.

President Mario Draghi said the first bond purchases with new money would take place on March 9th.

The euro zone’s central bank has said it will buy €60 billion a month until September 2016 or until inflation is pushed backed towards a target of close to but below 2 per cent.

The ECB, which left interest rates on hold at record lows just above zero at its meeting off-base in Cyprus on Thursday, lifted its growth forecast to 1.5 per cent for this year, from the 1 per cent it predicted in December. For 2016, growth of 1.9 per cent is now expected, up from a previous 1.5 per cent.

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“The latest economic data, and particularly survey evidence available up to February, point to some further improvements in economic activity at the beginning of this year,”

Mr Draghi told a news conference. “Looking ahead, we expect the economic recovery to broaden and strengthen gradually.”

An analysis of Reuters polls shows more than half the most important economic data reports from the euro zone since the start of the year have beaten the consensus forecast and many have topped the highest prediction.

Germany, Europe’s largest economy, has led the way. Inflation, now running at -0.3 pe rcent, is forecast at zero this year rising to 1.8 per cent in 2017. That is sufficiently close to the ECB’s target to suggest money printing will not run beyond September 2016.

The bank has a long way to go to convince markets its plans will be effective. Only half of the economists polled by Reuters think bond buying will help inflation rise towards the target of close to but below two percent and half think the purchases will be extended. There are tentative signs inflation has bottomed out.

The February reading of -0.3 per cent was above forecasts, oil prices have rebounded from January lows, growth is picking up and the euro hit a fresh 11-year low against the dollar overnight, boosting prospects for higher imported inflation.

“The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices,” Mr Draghi said.

GREEK HELP

The ECB is keen to stay out of the political debate over Greece’s future and Mr Draghi signalled the ECB would not allow a plea from Athens to be allowed to issue more short-term debt to get it over acute short-term funding problems. But he said the ECB had raised the amount of Emergency Lending Assistance (ELA) that the Greek central bank could provide to its banks.

Anticipation of the QE programme has driven euro zone borrowing costs down to the point where Spain can borrow for 10 years at under 1.3 per cent and investors actually pay for the privilege of lending to Germany for five years. Yields in Italy, Spain and Portugal dropped to record lows this week.

Some analysts have suggested the ECB would distort the bond market by buying bonds with negative yields. Mr Draghi said it would only steer clear of bonds yielding less than the ECB’s -0.2 per cent deposit rate.

Another concern is whether the ECB will find enough bonds to buy as the market is flush with uninvested cash while banks are under obligation to hold top tier assets, like government debt.

“There may be complexities. We think they are not relevant,” Mr Draghi said, noting that more than half euro zone sovereign bonds were held outside the currency area.

Mr Draghi said the ball was now in the court of euro zone governments who must contribute “decisively” to economic recovery with structural economic reforms.

“Decisive implementation of product and labour market reforms and actions to improve the business environment for firms need to gain momentum in several countries,” he said. “It is crucial that structural reforms be implemented swiftly, credibly and effectively.”

Reuters