Mario Draghi Has Just Proved The ECB Is Now Completely Powerless - page 2
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ECB stimulus may lack desired scale, QE an option - sources
European Central Bank's plan to buy private sector assets may fall short of its goal and pressure is likely to build for bolder action early next year, with government bond purchases an option, ECB sources said.
The euro zone's central bank started buying covered bonds last week and plans to buy asset-backed securities (ABS), or bundled loans, later this year -- both with a view to fostering lending to businesses and thereby supporting the bloc's economy.
ECB President Mario Draghi has said he wants the purchase plans, together with the provision of new cheap loans to banks, to increase the ECB's balance sheet towards its levels of early 2012 -- up to 1 trillion euros higher than today.
But the illiquid nature of the ABS market and the scarcity of quality paper available to buy means the ECB may struggle to achieve the stimulus effect it wants with the current programme.
The ECB's offer to banks in December of a second round of long-term loans, or TLTROs, may help it make progress towards the balance sheet target, but the paltry take-up of the first offer -- just 82.6 billion euros -- does not bode well.
"Some people know that this (the current purchase plan) will not work. It's too small and the problem is much, much bigger," said one source familiar with the matter.
The second source added: "We're perfectly aware these two markets are not that simple and certainly on their own will not be sufficient to expand our balance sheet as we intend."
Asked to comment for this story, an ECB spokesman said: "The targeted long term refinancing operations (TLTRO) and the purchases of ABS and covered bonds have to be seen as a package. The overall impact of these three measures on the balance sheet size of the Eurosystem will be sizeable."
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Draghi says ECB ready to act fast to tackle low inflation
The European Central Bank is ready to act in a timely manner if low inflation persists, ECB President Mario Draghi said on Friday.
"We will continue to meet our responsibility – we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us," Draghi said in a speech at an annual banking congress.
"If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases."
He also warned about the difficult economic situation in the euro zone, where growth remained weak and where no improvement in the coming months was expected.
"Over shorter horizons, however, indicators have been declining to levels that I would deem excessively low," he said.
"Survey-based measures of inflation expectations have generally been more stable, but the latest Survey of Professional Forecasters also indicates some decline – and at all horizons."
The euro zone economy is mired in low growth and weak inflation and the ECB in recent month stepped up its efforts to boost the recovery by flooding the market with billion of euros to unblock lending channels to households and companies.
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