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E.C.B. Says Impact of Asset-Buying Plan Will Be ‘Significant,’ but Does Not Detail Size E.C.B. Says Impact of Asset-Buying Plan Will Be ‘Significant,’ but Does Not Detail Size
(about 3 hours later)
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. FRANKFURT — The European Central Bank said on Thursday that a plan to begin buying private sector assets this month would have a “significant impact” on the eurozone economy. But European stocks slumped after the bank left open questions about how big the program would be.
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.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 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. Analysts expect the central bank to buy perhaps a fifth of that amount, and they have expressed doubt about whether the sum will be enough to revive bank lending and prevent the eurozone from slipping back into recession.
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. Stocks in Europe fell, in investors’ apparent frustration that the E.C.B. bond-buying program would not be more ambitious. The Euro Stoxx 50 index, which tracks eurozone blue-chip shares, dropped 2.77 percent, while the euro rose against the dollar.
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. “Investors are somewhat disappointed,” Emmanuel Petit, director of fixed income at Rothschild & Cie in Paris, said in an email message.
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. 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 was already effectively as low as it could go. Instead, analysts and investors were focused on the asset purchase program.
In a news conference after the meeting, Mr. Draghi declined to say how big the purchases would be. The size will depend on how the economy reacts to bond buying and the effectiveness of other central bank stimulus measures, he said.
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.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.” The central bank said it would buy assets from throughout the eurozone, including Cyprus and Greece, despite their deeply troubled economies. But the quality standards imposed on assets by central bank may limit the amount it can buy.
“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.” The E.C.B. said it expected its purchases to stimulate the market and prompt banks to package more of their loans into asset-backed securities or covered bonds, increasing the supply.
The Governing Council’s visit to Naples, one of its twice-yearly meetings outside Frankfurt, drew protests from people who blame the central bank for Italy’s economic woes.
Mr. Draghi said it was wrong to fault the bank for problems in Europe. He was alluding to banners, mostly denouncing austerity measures, that were hoisted by protesters outside 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 Caesar, 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.
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 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. Because of limits on the supply of private sector assets that meet central bank quality standards, many analysts expect the bank 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 of bonds would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans believe they will have to pick up the bill if some countries default on bonds owned by the central bank.
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. There were immediate complaints from Germany on Thursday that E.C.B. purchases of private sector assets would allow banks to unload their bad loans.
“The E.C.B. will presumably buy junk paper and thus increase the burden on taxpayers should defaults occur,” Hans-Werner Sinn, a prominent economist who is president of the Ifo Institute research group in Munich, said in a statement.
Recent economic data have added to fears that the eurozone is at risk of deflation. The annual rate of inflation in the eurozone is at a five-year low, having dropped to 0.3 percent in September, official data indicated this week. That is 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 August.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 despite edging up on Thursday, 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 drop 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 say they believe the central bank will need to overcome its reluctance to buy government bonds to restore growth.
Mr. Draghi on Thursday left the door open to that option, saying the central bank was “unanimous in the commitment to use other unconventional instruments if we were to judge that the risks for inflation were to deteriorate.”