Coverage: ECB ready to start stimulus
The European Central Bank will began buying bonds on Monday, but the bigger news is that the European economy seems to be improving.
The Wall Street Journal story by Brian Blackstone had these details:
The European Central Bank significantly raised its economic forecasts for this year and next in a sign of confidence that Europe—one of the global economy’s trouble spots in recent years—is gaining strength even before the bank launches a €1 trillion-plus ($1.1 trillion) stimulus package.
The ECB also announced it would start buying government bonds of eurozone countries, as well as debt issued by European institutions on Monday. The landmark program, known as quantitative easing, was unveiled at the central bank’s meeting in January.
The stimulus comes as Europe appears to have turned a corner, though its recovery still lags far behind those in the U.S. and U.K. Any additional lift from the €13.5 trillion eurozone economy—the world’s second largest after the U.S.—would be welcomed by policy makers as China’s economy, which is nearly as large as the eurozone’s, is weakening.
On Thursday, China lowered its economic growth forecast to about 7% for 2015. Although the projected rate is much higher that what advanced economies have seen, for China it would mark the weakest activity in a generation.
Jenny Cosgrave added these details about the purchases in her story for CNBC:
In a statement accompanying Draghi’s announcement, the central bank said it would purchase government bonds with a minimum remaining maturity of two years and a maximum remaining maturity of less than 31 years.
The ECB also said its intention is to be market-neutral, with the hope of creating as little “distortion” as possible.
The lender issued a list of international institutions located in the euro area on its website, including the European Investment Bank, the European Stability Mechanism, the European Union and Nordic Investment Bank, whose securities are eligible for the asset purchase program.
This initial list may be amended following the Governing Council meeting on 15 April 2015 on the basis of monetary policy considerations and reflecting risk management issues, the bank said.
Jack Ewing wrote for The New York Times that ECB President Mario Draghi was optimistic about the state of the Eurozone and seemed to take a little victory lap for the monetary policy decisions:
At a news conference in Cyprus, which is still recovering from a severe banking crisis two years ago, Mr. Draghi appeared unruffled by recent political turmoil in the eurozone, provoked by a change in government in Greece. Instead, he offered one of his most optimistic assessments in months of the eurozone economy — and gave the central bank much of the credit.
“Our monetary policy decisions have worked,” Mr. Draghi said. “It’s with some certain degree of satisfaction that the governing council has acknowledged this.”
Indications that the central bank plans to stick with its policies, and maintain an environment of low interest rates, briefly sent the euro currency below $1.10 for the first time in a dozen years. At the end of the European trading day it was at $1.1012.
Underpinning Mr. Draghi’s optimism, economists at the central bank on Thursday raised their forecast for growth this year to 1.5 percent, compared with a forecast in December of 1 percent. They increased their estimate for 2016 to 1.9 percent, up from a previous prediction of 1.5 percent.
Despite the more promising outlook, 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 Reuters story by John O’Donnell and Balazs Koranyi said that markets might not be on board with the ECB’s latest plan:
But the bank still has a long way to go to convince markets its plans will be effective. Only half of the economists polled by Reuters think bond buying will help inflation rise toward the target and half think the purchases will be extended.
The euro zone’s central bank has said it will buy 60 billion euros a month until Sept. 2016 or until inflation is pushed backed toward a target of close to but below 2 percent.
Economists and investors have questioned whether the ECB could accelerate or extend its bond buying should inflation fail to return from below zero to its target.
An analysis of Reuters polls shows more than half the euro zone’s most important reports on economic data since the start of the year have beaten the consensus forecast. Many have topped the highest prediction.
Germany, Europe’s largest economy, has led the way.
“Looking ahead, we expect the economic recovery to broaden and strengthen gradually,” ECB President Draghi told a news conference.
The ECB purchase plan should go a long way toward helping prop up the economy of the Eurozone. While it is improving, it has a ways to go before catching up with the rest of the world.