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The ECB's "extreme" anti-deflation measures could now be worth €1 trillion

A raft of measures announced today are “the last throw of the dice”, experts said.

ECB president Mario Draghi Source: Michael Probst/AP/Press Association Images

THE EUROPEAN CENTRAL bank today announced a raft of new measures, including a radical bond buying programme, that could bring its total economic intervention to €1 trillion.

The bank’s governing council also announced an interest rate cut which will again bring down the cost of tracker mortgages in Ireland, and brings the ECB interest rates to record low levels.

At the core of the ECB’s plan is the purchase of Asset Backed Securities – groups of loans and other financial instruments bundled together by banks and traded on an open market.

The hope, Merrion Stockbrokers chief economist Alan McQuaid said, is that further injections of cash to the banking system through ABS purchases will “make sure that banks spend and that money goes into the real economy”.

Draghi refused to comment on the size of the ABS programme, saying only that it  will have a “significant effect” on the ECB’s balance sheet.

However, McQuaid said that the measure, when taken with other policies announced earlier this summer, would push the total war-chest available to the ECB towards the €1 trillion mark when it begins its market interventions later this month.

While the ABS programme announced today won’t kick off until October, Draghi’s previously announced TLTRO programme, which is designed to give the European SME sector a credit boost, will start in September.

Drastic measures

Today’s move by the ECB is significantly more than many analysts were predicting. McQuaid said that it adds up to “extreme measures…it’s the last throw of the dice”.

The only weapon left in the ECB’s armoury for combating deflation in the currency bloc is a broad based programme of Government bond purchases, known as Quantitative Easing (QE).

Asked if the ECB governing council discussed QE, Draghi said today.

Yes, QE was discussed. Some were in favour of doing more, some were in favour of doing less, our proposal strikes the mid-road

Davy economist David McNamara said that he expects Draghi to push for a full-scale QE programme in the future, although core European economies including Germany are likely to resist such a push.

The immediate effect of today’s measures will be on tracker mortgage holders, he said, but added that the ABS programme could help push down general over the counter lending rates in the medium term.

The euro’s value dropped sharply on the news – down over 1 per cent against the US dollar to $1.30 early this afternoon, which will be viewed both here and in Europe as a positive for the exporting sector.

Irish shares jumped in the aftermath of the announcement, with the ISEQ overall index climbing more than 1% on the announcement after falling steadily during the morning.

The ECB has also cut its GDP projections, with just 0.9% predicted for the block this year, down from 1%. 2015 expectations were also marked down to 1.6% from 1.7%, while 2016 targets were marked up by 0.1% to 1.9%.

ISEQ Overall Source: Irish Stock Exchange

Draghi told journalists today that the decisions announced were not unanimous among the members of the governing council.

“There was a comfortable majority in favour of doing the programme”, he said. The ECB president argued that the asset backed security (ABS) purchase programme “should be used to extend credit to the economy”.

When asked about the nature of the ABS purchases, Draghi said:

“The purchase of ABS will involved both newly created and existing ABS, and will include real estate ABS…and a wide range of ABS containing loans to the real economy.”

Draghi defended structural reforms of European economies, which have been criticised as being excessively harsh on European workers.

Structural reforms have a cost…but isn’t lack of growth a cost in itself? In some countries the (pay) levels of new entrants in the labour market are at the same level as those seen in the 1980s. Isn’t that a cost?

Additional reporting by Jack Horgan-Jones

Read: Is this the big bazooka? – €400 billion funding package announced by Draghi>

Read: ECB announces negative rate in bid to fight deflation>

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About the author:

Peter Bodkin  / Editor, Fora

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