ECB unveils details of ABS and covered bonds programmes - UPDATE
The European Central Bank (ECB) has decided to keep key rates unchanged and unveiled further details of its asset-backed security (ABS) and covered bonds programmes that launch in mid-October.
The central bank on Thursday decided to maintain the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility at 0.05%, 0.30% and -0.20% respectively.
ABS and buying of covered bonds will last at least two years and will aim to address low inflation and weak economic growth in the euro-area. Asset purchases will start in fourth quarter 2014, beginning with covered bonds in second-half of October.
The monetary authority will buy debt of countries with ratings below BBB-, provided these countries are under a rescue programme, such as Cyprus and Greece.
The ECB said ABS and covered bonds from Greece and Cyprus that are currently not eligible as collateral for monetary policy operations will be subject to specific rules with risk-mitigating measures.
“Together with the targeted longer-term refinancing operations, the purchase programmes will further enhance the transmission of monetary policy,” the ECB explained in a statement.
“They will facilitate credit provision to the euro area economy, generate positive spill-overs to other markets and, as a result, ease the ECB’s monetary policy stance. These measures will have a sizeable impact on the Eurosystem’s balance sheet and will contribute to a return of inflation rates to levels closer to 2%.”
In a press conference following the latest policy announcement, Draghi said he hoped the new measures would impact on its ultimate yardstick of inflation.
Draghi expects the €650bn balance sheet to expand to its level of early 2012 when it stood at €2.7trn following the allocation of the first three-year LTRO.
When questioned on the possibility of full-on quantitative easing, Draghi said: "We did a lot of things since June. We lowered interest rates, went negative on the deposit facility, launched a third covered bond programme, launched TLTROs so let’s see."
He said the ECB will be closely watching inflation and stands unanimous to use other instrument measures to address risks of “too low inflation for too long of time”.
Berenberg senior economist Christian Schulz believes the ECB remained somewhat cagey on the details surrounding the new measures.
"The ECB put flesh to the bones of the asset purchase programmes pre-announced at the September meeting. However, it did not deliver a single big number and did not go beyond the September announcements. That may come as a disappointment to some observers. In particular, the language on purchases of sovereign bonds did not change."
Alasdair Cavalla, economist at Cebr said, the pressure on the ECB shows no sign of abating.
Cavalla highlighted that the Eurozone unemployment rate for August, released on Tuesday, stayed at 11.5%, little down from its all-time high of 12%. The same day consumer price inflation dropped from 0.4% in August to 0.3% in September.
Draghi confessed that unemployment still remained high and inflation was not expected to pick up until 2015. He also said geopolitical risks may dampen sentiment in the euro-area.
“Cebr’s view remains that full quantitative easing is necessary (although probably not sufficient) to raise the growth rate,” Cavalla said. “But we expect that the ECB will delay for some months before introducing such a policy.”