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E.C.B. Leaves Key Interest Rate Unchanged as It Looks to Buy Assets E.C.B. Says Impact of Asset-Buying Plan Will Be ‘Significant,’ but Does Not Detail Size
(about 1 hour later)
FRANKFURT — The European Central Bank on Thursday left its benchmark interest rate unchanged, as it turned its focus to buying private-sector assets as a way to revive bank lending and pump money into the eurozone economy. FRANKFURT — The European Central Bank said Thursday that a plan to begin buying private-sector assets this month would have a “significant impact” on the eurozone economy, but it left open questions about how big the program would be.
The decision to keep the benchmark interest rate at 0.05 percent was a foregone conclusion because the rate is already effectively as low as it can go. Instead, the central bank is relying on its plan to buy packages of bank loans known as asset-backed securities, which it said on Thursday it would start later this month and expected to last at least two years. Mario Draghi, the central bank president, said it could draw on a pool of 1 trillion euros, or about $1.26 trillion, of securities tied to bank loans, known as asset-backed securities and covered bonds.
Analysts polled by Reuters expected the central bank to aim to purchase 200 billion euros, or about $252 billion, in asset-backed securities as well covered bonds, which are another kind of security based on bundles of bank loans. Analysts expect the central bank to buy perhaps a fifth of that amount, and they have expressed doubt whether the sum will be enough to revive bank lending and prevent the eurozone from slipping back into recession.
In a news conference after the meeting of the central bank’s Governing Council in Naples, Italy, Mario Draghi, the president of the E.C.B., declined to say how big the asset purchases would be. Investors appeared to be disappointed that the central bank did not promise more stimulus. Stocks in Europe fell, with the Euro Stoxx 50 index, which tracks eurozone blue-chip shares, dropping nearly 2 percent, while the euro rose against the dollar.
The size will depend on the effectiveness of other central bank stimulus measures, he said. There is a potential pool of €1 trillion in asset-backed securities and covered bonds, though the central bank will not buy that much, he said. In addition, the central bank will not accept securities that it deems overly complex, he added. Meeting in Naples, Italy, the central bank’s Governing Council decided to keep the benchmark interest rate at 0.05 percent. The decision was a foregone conclusion because the rate is already effectively as low as it can go. Instead, analysts and investors were focused on the asset purchase program.
In answer to protesters in Naples on Thursday, Mr. Draghi said it was wrong to blame the European Central Bank for economic problems in Europe. In a news conference after the meeting, Mr. Draghi declined to say how big the purchases would be. The size will depend on the effectiveness of other central bank stimulus measures, he said.
“Go back and ask yourself, where were you two years ago,” he said, with a hint of annoyance in his voice. Listing measures that the central bank took to avert disaster, he said, “We fought a systemic crisis.” While there is a potential asset pool of €1 trillion, he said, the central bank will not buy that much. In addition, it will not accept securities that it deems overly complex, he added.
In answer to protesters in Naples on Thursday, Mr. Draghi said it was wrong to blame the European Central Bank for economic problems in Europe. He was alluding to the banners, mostly denouncing austerity measures, that were hoisted by protesters outside of the meeting at the 18th century Capodimonte Museum on a hill in the northern section of Naples. One read: “Job insecurity, poverty, unemployment, speculation. Free us from the E.C.B.!” Another depicted Mr. Draghi as Ceasar, with laurel leaves around his ears, and read “Block the E.C.B.”
“Go back and ask yourself, where were you two years ago,” Mr. Draghi said, with a hint of annoyance in his voice. Listing measures that the central bank took to avert disaster, he said, “We fought a systemic crisis.”
“I find the description of the E.C.B. as the guilty actor needs to be corrected,” he said.“I find the description of the E.C.B. as the guilty actor needs to be corrected,” he said.
While significant, asset purchases of €200 billion would be far short of the €1 trillion that the central bank would like to inject into the eurozone economy through a combination of asset purchases and cheap, long-term loans to banks, aimed at spurring growth and averting deflation. Analysts polled by Reuters expected the central bank to aim to purchase €200 billion, or about $252 billion, in asset-backed securities as well covered bonds.
While significant, that amount would be far short of the €1 trillion that the central bank would like to inject into the eurozone economy through a combination of asset purchases and cheap, long-term loans to banks, aimed at spurring growth and averting deflation.
Many economists fear that the eurozone economy is in danger of officially tipping into deflation, a condition in which falling prices prompt consumers to delay purchases, undercutting sales by businesses and leading to increased unemployment.Many economists fear that the eurozone economy is in danger of officially tipping into deflation, a condition in which falling prices prompt consumers to delay purchases, undercutting sales by businesses and leading to increased unemployment.
Because the supply of private-sector assets that meet E.C.B. quality standards is limited, many analysts expect the central bank to eventually resort to purchases of government bonds, emulating the so-called quantitative easing used by the Federal Reserve in the United States. Because the supply of private-sector assets that meet central bank quality standards is limited, many analysts expect it to eventually resort to purchases of government bonds, emulating the so-called quantitative easing used by the Federal Reserve in the United States.
Such action would inevitably provoke an outcry in Germany, and most analysts do not expect the central bank to begin buying government bonds until next year, if ever. In Germany, there is widespread fear that the central bank’s buying bonds would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans believe they would have to pick up the tab if some countries defaulted on bonds owned by the central bank.Such action would inevitably provoke an outcry in Germany, and most analysts do not expect the central bank to begin buying government bonds until next year, if ever. In Germany, there is widespread fear that the central bank’s buying bonds would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans believe they would have to pick up the tab if some countries defaulted on bonds owned by the central bank.
Stocks in Europe, which were trading lower in advance of the central bank’s rate decision, recovered in the afternoon and were essentially flat.
Recent economic data have added pressure on the central bank to act. The annual rate of inflation in the eurozone is at a five-year low, having fallen to 0.3 percent in September, official data indicated this week. That’s far from the central bank’s target of slightly less than 2 percent, which was last reached nearly two years ago.Recent economic data have added pressure on the central bank to act. The annual rate of inflation in the eurozone is at a five-year low, having fallen to 0.3 percent in September, official data indicated this week. That’s far from the central bank’s target of slightly less than 2 percent, which was last reached nearly two years ago.
In addition, unemployment in the eurozone remained at 11.5 percent. In addition, unemployment in the eurozone remained at 11.5 percent in August.
The central bank may take some comfort in the decline of the value of the euro, which is near a two-year low against the dollar. A weak euro makes imported goods more expensive for residents of the eurozone and contributes to higher inflation.The central bank may take some comfort in the decline of the value of the euro, which is near a two-year low against the dollar. A weak euro makes imported goods more expensive for residents of the eurozone and contributes to higher inflation.
Slumping energy prices were one reason for the decline in inflation in September, from 0.4 percent in August. But there was also a decline in the so-called core inflation rate, which excludes prices for food and energy because they tend to fluctuate more.Slumping energy prices were one reason for the decline in inflation in September, from 0.4 percent in August. But there was also a decline in the so-called core inflation rate, which excludes prices for food and energy because they tend to fluctuate more.
The decline in that rate is potentially more worrying for the central bank because it is a more direct reflection of slack demand and the poor health of the eurozone economy.The decline in that rate is potentially more worrying for the central bank because it is a more direct reflection of slack demand and the poor health of the eurozone economy.
Recent surveys show that business managers have become more pessimistic, further increasing concern that the eurozone economy is suffering from the crisis in Ukraine and related sanctions against Russia.Recent surveys show that business managers have become more pessimistic, further increasing concern that the eurozone economy is suffering from the crisis in Ukraine and related sanctions against Russia.
Last month, the European Central Bank offered four-year loans to commercial banks in the eurozone that were nearly interest-free, in an effort to make more credit available to businesses and households.Last month, the European Central Bank offered four-year loans to commercial banks in the eurozone that were nearly interest-free, in an effort to make more credit available to businesses and households.
But demand from banks for the loans was less than expected, and many economists believe the central bank will need to overcome its reluctance to buy government bonds in order to restore growth.But demand from banks for the loans was less than expected, and many economists believe the central bank will need to overcome its reluctance to buy government bonds in order to restore growth.