The European Central Bank is to embark on a large-scale quantitative easing (QE) programme, following its peers in Britain, Japan and the US, in an attempt to revive inflation.
According to JPMorgan Chase, Frankfurt will buy as much as €40 billion of asset-backed securities as part of a program to stimulate the region’s economy, according to JPMorgan Chase.
The central bank will limit purchases to the new-issue market over a three-year period and focus on securities with the highest credit ratings, the New York-based bank wrote in a note to clients.
It is not clear if ECB president Mario Draghi will announce the measure at tomorrow's monthly meeting.
About €47 billion of asset-backed debt has been sold in the region this year.
JPMorgan said the ECB was preparing to buy asset-backed securities as it strives to revive lending to small-and medium-sized businesses that employ about 70 per cent of the European Union’s private-sector workers.
While the region’s outstanding asset-backed securities market is as large as €1.2 trillion, a purchase program of this magnitude would necessitate it being expanded beyond SME-backed loans, the analysts said in the note.
“The purchase plan is important for a number of reasons, but broadly because it puts downward pressure on the cost of issuing ABS, and ultimately feeds into lower product margins on real economy lending,” an analyst said.
The ECB has hired BlackRock to provide advice as it thrashes out the final design of its plan, including how much, which assets, and what ranking of bonds it will buy.
Mr Draghi has been promoting securities backed by loans to SMEs in a bid to increase the supply of credit to Europe’s businesses.
According to currency strategists polled by Reuters, the euro already reflects the likelihood of an ECB asset- purchase programme, but the currency will probably continue to fall in the year ahead as a US dollar rally gathers pace.
The euro has weakened around 1 per cent since Mr Draghi dropped a heavy hint last month at Jackson Hole that he was prepared to print money and support relaxing fiscal policy to avoid deflation and another recession in the region.
"A lot of the impact of QE comes pre-announcement and an asset-backed securities programme is, in my view, fully priced in," said Derek Halpenny, European head of market research at BTMU in London.
He added the probability of the ECB buying sovereign debt, as opposed to its widely discussed plans to deepen an ABS market in Europe from which it can make purchases, is only partly reflected in the current euro exchange rate.
Bloomberg and Reuters
