The European Central Bank will press the button on Monday on a €1.1tn stimulus programme that will play a major role in putting the eurozone back on track for sustained growth, its president Mario Draghi said on Thursday.
The ECB will pump the €60bn a month into the euro economy as the first phase in its quantitative easing programme that Draghi said would combine with low oil prices and recovering consumer confidence to spur growth and propel inflation back up close to its 2% target.
Almost six years after the US Federal Reserve and Bank of England began pumping funds into their economies through their own QE programmes, the ECB is hopeful that driving down the long term cost of credit put continental Europe onto the same path to recovery as the US and UK.
But in a clear prompt for Greece to speed up negotiations over its huge debts, Draghi said Athens would be excluded from the latest attempt to kickstart the flagging eurozone economy until it agrees a new debt deal with Brussels.
He said Greece had already enjoyed a boost in lending by the ECB under its emergency measures, taking the total outstanding debt with Frankfurt from €50bn to €100bn or 68% of GDP. Lending more to Greek banks or to support government spending would be beyond the ECB’s remit, he warned.
Draghi said: “The ECB is a rule-based institution. It is not a political institution.”
The central bank also raised its growth forecasts for the currency zone, predicting it would grow by 1.5% this year, up from a forecast of 1.0% made three months ago. That would be followed by 1.9% growth in 2016 (up from 1.5%).
Draghi said new ECB growth forecasts reflect “the favourable impact of lower oil prices, the weaker effective exchange rate of the euro and the impact of the ECB’s recent monetary policy measure,” signalling that this was now the ECB’s last stimulus action and an improvement of the economic situation now depends on other factors.
Markets took the confirmation of QE until at least 2017 in their stride after analysts said most elements were already known and only the details of the scheme needed to be fleshed out. The euro slipped to a fresh 11-year low while stock markets edged higher, with the FTSE 100 reaching a new record high of 6961.
Draghi said buying assets on a broad-based level was the “final set of measures,” adding that governments needed to pick up the baton.
“In order to increase investment, boost job creation and raise productivity, both the decisive implementation of product and labor market reforms and actions to improve the business environment for firms need to gain momentum in several countries.”
The ECB programme, christened the Public Sector Purchase Programme, will involve the purchase of €60bn of government and public agency securities each month, in a way designed to “avoid interfering with the market price formation mechanism”, which means purchasing a broad range of assets so as not to influence their price.
Some government bonds will be off limits if they have a negative yield of more than -0.2% - a rule designed to prevent the ECB making a large loss on its investment. German two-year bonds, regarded as among the safest assets in the world, were trading at below -0.2% on Thursday and will therefore be excluded from the scheme.
Athens is running out of options to fund itself despite striking a deal with the euro zone in February to extend its bailout by four months. Faced with a fall in revenues, it is expected to run out of cash by the end of March, maybe sooner.
One funding option would be to raise a €15bn cap on Athens’ issuance of short-term debt. The cap has already been reached, and the ECB has a veto over lifting it.
The cap is sensitive because Greek banks have used bonds to access central bank funding and then used it to invest in more sovereign bonds, helping the state cover its short-term needs. This is what Draghi refused to consider without an agreement in Brussels on a new deal.
Alex Edwards, head of the corporate desk at UKForex, said confidence in the eurozone remained weak despite the stimulus package and predicted that the euro would continue to fall against the dollar.
“Putting it mildly, there isn’t a lot of confidence in the euro system at the moment,” he said. “Breaking through $1.10 will likely mean a new range is soon carved out in euro versus dollar. Given the market’s current reaction to Draghi’s comments, it might not be long before we see parity with the dollar.”
guardian.co.uk © Guardian News and Media Limited 2010