European Central Bank adds bond purchases to negative interest rates policy
By Joseph Lawler | October 2, 2014 | 9:21 am
Politics,PennAve,Joseph Lawler,Economy,Federal Reserve,Monetary Policy,Europe,EU
The European Central Bank announced its latest effort to stave off a recession in Europe on Thursday, unveiling a new program of large-scale bond purchases and promising to keep interest rates low.
Speaking in Naples, Italy, on Thursday, ECB President Mario Draghi announced plans for buying asset-backed securities and covered bonds over the course of two years beginning in October.
“These purchases will have a sizeable impact on our balance sheet” and play a “key role in the financing of our economy,” Draghi said at a press conference following the announcement of the ECB’s decision to keep interest rates unchanged after cutting them in recent months.
Draghi said that the bond purchases should “ease the monetary policy stance more broadly” and promised that the central bank would act again if necessary if the program failed to lift inflation and growth. “The Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate,” he said. Whether that would include a Federal Reserve-style quantitative easing program of buying government bonds if necessary is unclear.
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Nevertheless, Draghi declined to assign a specific euro-value to the amount of bonds the bank would purchase, a key indication of the size of the stimulus that investors were anticipating.
Thursday’s move is the central bank’s latest effort to reverse Europe’s declining economic fortunes using unconventional monetary policy, an effort that has also including a program to offer banks cheap funding. In previous months, it cut its main short-term interest rate target to 0.05 percent and the interest rate it pays on excess bank liquidity to -0.2 percent. Negative interest rates are nearly uncharted territory for a major central bank, and Draghi has suggested that they can go no lower, necessitating the use of bond purchases to further ease monetary conditions.
In recent months, the ECB has moved its policy in the opposite direction of the Federal Reserve’s. As unemployment in the U.S. has fallen sharply and inflation has edged up over the course of the year, the Fed has set its bond-buying program on a course to finish in October and moved toward normalizing policy. At the same time, inflation has fallen near zero in the euro zone, to 0.3 percent annually in September, and unemployment remains at 11.5 percent.
U.S. investors and policymakers view the possibility of a triple-dip recession in Europe, which also saw negative growth in 2012, as a potential drag on U.S. growth as well.
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