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E.C.B. to Begin Bond-Buying Program on Monday E.C.B. to Begin Bond-Buying Program on Monday
(35 minutes later)
NICOSIA, Cyprus — The European Central Bank will begin its big new stimulus program on Monday, the bank’s president, Mario Draghi, announced on Thursday, and he predicted improvements in the economy and in the eurozone’s inflation picture as a result of the effort.NICOSIA, Cyprus — The European Central Bank will begin its big new stimulus program on Monday, the bank’s president, Mario Draghi, announced on Thursday, and he predicted improvements in the economy and in the eurozone’s inflation picture as a result of the effort.
That was one of many details the financial markets had been awaiting since the central bank announced in January that it would embark on a program of large-scale asset purchases — a so-called quantitative easing effort intended to fix the collapse in consumer prices. The starting date was one of many details the financial markets had been awaiting since the central bank announced in January that it would embark on a program of large-scale asset purchases — a so-called quantitative easing effort intended to fix the collapse in consumer prices.
Staff economists at the central bank raised their forecast for growth this year to 1.5 percent, and their estimate for 2016 to 1.9 percent. Mr. Draghi said that recent data pointed to improvement in the eurozone economy, but that the staff projections indicated that the central bank would not approach its inflation target of below, but close to, 2 percent until 2017 at the earliest. Economists at the central bank raised their forecast for growth this year to 1.5 percent, and their estimate for 2016 to 1.9 percent. Mr. Draghi said that recent data pointed to improvement in the eurozone economy, but that the staff projections indicated that the central bank would not approach its inflation target of below, but close to, 2 percent until 2017 at the earliest.
“The risks remain on the downside,” Mr. Draghi said at a news conference, “but have diminished.”“The risks remain on the downside,” Mr. Draghi said at a news conference, “but have diminished.”
Because of low oil prices, inflation is expected to remain low — or even in negative territory — until later this year, the central bank said. But it revised its inflation forecast for 2016 upward, to 1.5 percent, and its 2017 estimate to 1.8 percent. Markets fluctuated during the briefing, but stocks and bonds eventually rallied. Blue-chip shares in the eurozone were trading about 1 percent higher in midafternoon trading, while government bond yields fell slightly. The euro, which has been trading at an 11-year low against the dollar, rose at first but then fell back to $1.1020, slightly down on the day.
Because of low oil prices, inflation is expected to remain low — or even in negative territory — until later this year, the central bank said on Thursday. But it revised its inflation forecast for 2016 upward, to 1.5 percent, and its 2017 estimate to 1.8 percent.
The central bank, meeting in the capital city of Cyprus, the easternmost member of the eurozone, left its benchmark rate at 0.05 percent. With inflation in negative territory, the central bank is expected to keep the main rate at close to zero indefinitely.The central bank, meeting in the capital city of Cyprus, the easternmost member of the eurozone, left its benchmark rate at 0.05 percent. With inflation in negative territory, the central bank is expected to keep the main rate at close to zero indefinitely.
The monetary policy meeting was the first since the central bank said on Jan. 22 that it would begin buying eurozone government bonds and other debt at a monthly rate of 60 billion euros, or about $67 billion, in an attempt to push inflation back toward the official target.The monetary policy meeting was the first since the central bank said on Jan. 22 that it would begin buying eurozone government bonds and other debt at a monthly rate of 60 billion euros, or about $67 billion, in an attempt to push inflation back toward the official target.
Greece, which is seeking new terms with the European Central Bank and other international creditors, was also a topic of discussion. Mr. Draghi said that the central bank was willing to step up its assistance to Athens, “provided the conditions are in place.” Greece, which is seeking new terms with the European Central Bank and other international creditors, was a topic of to which Mr. Draghi devoted considerable time during the news conference. Mr. Draghi said that the central bank was willing to step up its assistance to Athens, “provided the conditions are in place.”
The caveat indicates that the new Greek government still has work to do to convince its lenders that it is serious about making the economic changes its lenders are demanding. The caveat indicates that the new Greek government still has work to do to convince its lenders — which include the European Commission and the International Monetary Fund — that it is serious about making the economic changes its lenders are demanding in exchange for extending the country’s bailout program by at least four months.
The European Central Bank’s lending to Greece right now is 68 percent of the country’s gross domestic product — the highest in the eurozone — Mr. Draghi said. “In this sense, the E.C.B. is the central bank of Greece,” he added.The European Central Bank’s lending to Greece right now is 68 percent of the country’s gross domestic product — the highest in the eurozone — Mr. Draghi said. “In this sense, the E.C.B. is the central bank of Greece,” he added.
The central bank’s governing council on Thursday decided to raise its emergency lending to Greek commercial banks by €500 million, Mr. Draghi said.The central bank’s governing council on Thursday decided to raise its emergency lending to Greek commercial banks by €500 million, Mr. Draghi said.
And he indicated that the central bank would consider resuming its policy of letting the Greek banks use their government’s bonds as collateral to obtain regular loans from the European Central Bank — but only when Athens demonstrated its commitment to making the economic changes the international creditors were demanding.And he indicated that the central bank would consider resuming its policy of letting the Greek banks use their government’s bonds as collateral to obtain regular loans from the European Central Bank — but only when Athens demonstrated its commitment to making the economic changes the international creditors were demanding.
Because Greek government bonds are rated below investment grade, the European Central Bank must grant a waiver to let the banks use them as collateral. The central bank decided in February to rescind its previous waiver, in light of the uncertainties surrounding the election of the new Greek government.Because Greek government bonds are rated below investment grade, the European Central Bank must grant a waiver to let the banks use them as collateral. The central bank decided in February to rescind its previous waiver, in light of the uncertainties surrounding the election of the new Greek government.
Analysts have questioned whether the European Central Bank would be able to find enough debt to meet its goals. Demand for government bonds issued by Finland, Germany and some other countries is so strong that the bonds have negative interest rates. In effect, investors are willing to pay some debtors to keep their money safe. As for the European Central Bank’s new stimulus program, analysts have questioned whether the central bank would be able to find enough debt to meet its goals. Demand for government bonds issued by Finland, Germany and some other countries is so strong that some of them have negative interest rates. In effect, investors are willing to pay some debtors to keep their money safe.
Mr. Draghi said on Thursday that the European Central Bank would not buy bonds with yields below the interest rate the central bank pays on commercial bank deposits that it holds, which is currently a negative rate of minus 0.2 percent. That is approximately the negative rate at which German two-year bonds have been trading. There was little new information on that count on Thursday. But Mr. Draghi did say that the European Central Bank would not buy bonds with yields below the interest rate the central bank pays on commercial bank deposits that it holds, which is currently a negative rate of minus 0.2 percent. That is approximately the negative rate at which German two-year bonds have been trading.
But the yields of 10-year bonds of eurozone countries all remain in positive territory.
Bond buying is a way for the European Central Bank to effectively print money and inject it into the economy. But confidence in the central bank’s ability to rekindle inflation could suffer if the market is so tight that it is unable to meet its goal of buying €60 billion of debt a month.Bond buying is a way for the European Central Bank to effectively print money and inject it into the economy. But confidence in the central bank’s ability to rekindle inflation could suffer if the market is so tight that it is unable to meet its goal of buying €60 billion of debt a month.
“The E.C.B. is unlikely to find it very easy to accumulate such a large volume of paper,” analysts at Barclays said in a note to investors.“The E.C.B. is unlikely to find it very easy to accumulate such a large volume of paper,” analysts at Barclays said in a note to investors.
Still, the policy might already have had a beneficial effect. Market interest rates have been falling in anticipation of the bond-buying campaign. That is making it possible for companies to borrow money more cheaply than ever. What companies save on interest payments they can invest in expansion and hiring.Still, the policy might already have had a beneficial effect. Market interest rates have been falling in anticipation of the bond-buying campaign. That is making it possible for companies to borrow money more cheaply than ever. What companies save on interest payments they can invest in expansion and hiring.
“We are investing a lot right now,” Hakan Samuelsson, the chief executive of Volvo Car Group, said in an interview at the Geneva International Motor Show on Tuesday. “It’s an advantage that we have low interest rates.”“We are investing a lot right now,” Hakan Samuelsson, the chief executive of Volvo Car Group, said in an interview at the Geneva International Motor Show on Tuesday. “It’s an advantage that we have low interest rates.”
Sweden, where Volvo is based, is not a member of the eurozone, but it closely tracks its monetary policy with that of the currency bloc, and the Swedish benchmark rate is below zero. Volvo’s decision to renew its model line and rebuild market share in the United States was not prompted by low interest rates, Mr. Samuelsson said.Sweden, where Volvo is based, is not a member of the eurozone, but it closely tracks its monetary policy with that of the currency bloc, and the Swedish benchmark rate is below zero. Volvo’s decision to renew its model line and rebuild market share in the United States was not prompted by low interest rates, Mr. Samuelsson said.
“But,” he added, “it’s good timing for us.”“But,” he added, “it’s good timing for us.”
Stock indexes in Germany and other countries hit record highs this week, in part because investors expected cheaper borrowing costs to have a positive effect on corporate profits.
Analysts at Nomura said they expected the forecast for economic growth in 2015 in the eurozone to be revised upward, to 1.3 percent from 1 percent, and to 1.7 percent from 1.5 percent for 2016. There have been some indications that the eurozone economy is improving, in part because of lower fuel prices and the effects of cheap borrowing rates.
But growing fears of spiraling consumer prices prompted the European Central Bank to act. Consumer prices dropped 0.3 percent in February from a year earlier, the third consecutive month of falling prices, according to an official estimate. Declining prices can put downward pressure on wages, undercut corporate revenue and impede growth at a time when the eurozone is still struggling to cut the unemployment rate, which was at 11.2 percent in January.
The European Central Bank, which is based in Frankfurt, meets twice a year in a different city. The choice of Cyprus is noteworthy because the country continues to suffer from the effects of the collapse of its banks in 2013, and from a rescue plan that forced depositors to shoulder some of its cost.The European Central Bank, which is based in Frankfurt, meets twice a year in a different city. The choice of Cyprus is noteworthy because the country continues to suffer from the effects of the collapse of its banks in 2013, and from a rescue plan that forced depositors to shoulder some of its cost.
Many Cypriots are bitter toward the European Central Bank, which they accuse of making the country’s problems worse by continuing to keep the banks on life support long after it was clear that they were insolvent. The delay raised the cost of the bank collapse and exacerbated the economic pain in Cyprus, critics say. Unemployment is 16.1 percent, and residents still face restrictions on transferring money out of the country.Many Cypriots are bitter toward the European Central Bank, which they accuse of making the country’s problems worse by continuing to keep the banks on life support long after it was clear that they were insolvent. The delay raised the cost of the bank collapse and exacerbated the economic pain in Cyprus, critics say. Unemployment is 16.1 percent, and residents still face restrictions on transferring money out of the country.
Some residents of Cyprus expressed their dissatisfaction with the central bank’s behavior by staging demonstrations on Wednesday and Thursday outside the conference center where Mr. Draghi was scheduled to hold a news conference after the rate decision.Some residents of Cyprus expressed their dissatisfaction with the central bank’s behavior by staging demonstrations on Wednesday and Thursday outside the conference center where Mr. Draghi was scheduled to hold a news conference after the rate decision.