The European Central Bank (ECB) Thursday announced a new asset purchase program, which aims to bolster the region’s economy and kickstart credit growth. The program is expected to last for at least two years.
The ECB left interest rates unchanged Thursday, but also revealed certain details of its plans to purchase asset-backed securities and covered bonds in a bid to bolster the transmission of monetary policy and support the provision of credit to the Euro area economy. The purchases are slated to start with covered bonds in second-half of October. The ECB will then start buying asset-backed securities (ABS) after external service providers have been selected, it said.
The asset purchase programs, along with a series of targeted longer-term refinancing operations, “will have a sizeable impact on our balance sheet”, said Mario Draghi, president of the ECB.
“The new measures will support specific market segments that play a key role in the financing of the economy. They will thereby further enhance the functioning of the monetary policy transmission mechanism, facilitate credit provision to the broad economy and generate positive spillovers to other markets,” Draghi said.
The bank also expects these actions to help bring inflation expectations in line with its target of maintaining inflation below, but close to, 2%. “Taking into account the overall subdued outlook for inflation, the weakening in the euro area’s growth momentum over the recent past and the continued subdued monetary and credit dynamics, our asset purchases should ease the monetary policy stance more broadly. They should also strengthen our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies,” said Draghi.
He noted that the bank is still expecting a moderate recovery in the Euro area in 2015, but that the risks to the outlook remain on the downside. “In particular, the recent weakening in the euro area’s growth momentum, alongside heightened geopolitical risks, could dampen confidence and, in particular, private investment. In addition, insufficient progress in structural reforms in euro area countries constitutes a key downward risk to the economic outlook,” he said.
“As all our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to our aim. Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate,” said Draghi.