Keen to keep a low profile over the Greek crisis, the European Central Bank will focus on improved growth prospects on Thursday and unveil some but not all the details of its €1 trillion-plus bond buying plan.
The ECB, meeting in Cyprus, will keep rates on hold and probably lift growth forecasts to reflect a string of positive data surprises. But it could cut inflation projections as it incorporates the full effect of a dramatic oil price fall, backing its case to buy €60 billion worth of bonds a month from March to spur inflation. The bank 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 towards the target of close to but below two per cent and half think the purchases will be extended beyond September 2016.
The ECB has said its money printing would last “at least” until September 2016 and until a “sustained adjustment” in the inflation path emerges. Still, there are at least tentative signs inflation has bottomed out. The February reading at -0.3 per cent was above forecasts, oil prices have rebounded from January lows, growth is picking up and the euro hit a fresh 11-year low against the dollar overnight, boosting prospects for higher imported inflation. The bank could forecast deflation for 2015, sharply cutting its 0.7 per cent inflation projection from December but some analysts said the actual figure could end up in positive territory, also getting a boost from the ECB’s bond buying.
Details
Markets will be looking for how quantitative easing will work, when the buying will start, whether it applies to paper with negative yields and how the purchases will be distributed along the yield curve. Anticipation of the QE programme has driven euro zone borrowing costs down to the point where Spain can borrow for 10 years at under 1.3 per cent and investors actually pay for the privilege of lending to Germany for five years.
Yields in Italy, Spain and Portugal dropped to record lows this week. Another concern is whether the ECB will find enough bonds to buy as the market is flush with uninvested cash while banks are under obligation to hold top tier assets, like government debt.
“The massive ECB buying will start in times of stagnating supply at the bond market,” SEB economist Thomas K?bel said. “We see some risks that the ECB may be unable to buy bonds at the targeted monthly rate of €60 billion.”
The buying will start just as European economies appear to have turned a corner.
ECB Executive Board member Peter Praet has already said the bank will likely lift its growth forecasts. Fourth quarter growth beat expectations, recent consumption figures, particularly in Germany, have exceeded forecasts, sentiment indicators have turned up while growth is also poised for a boost from lower energy prices and a weaker euro.
Although ECB money printing is designed to lift the entire euro zone, some of its hardest hit economies, Greece and Cyprus, do not yet qualify to use it. Both have been bailed out by their European Union partners.
On Wednesday, Cypriot president Nicos Anastasiades set out the case for allowing his country into the scheme in a meeting with ECB President Mario Draghi, hoping to gain eligibility in the bond buying within weeks.
As the two spoke, thousands of Cypriots gathered to protest against what one banner described as an ‘experiment’ that had created ‘unemployment and poverty’. “A few years ago Cyprus could be described relatively prosperous. Now we are talking about people struggling to buy food. This troika (of the ECB, EU and International Monetary Fund) has brought us nothing but poverty,” said Lygia Poullou, 69, a pensioner.
Although struggling Greece will remain a headache, the ECB is desperate to stay out of the political debate over the country’s future and the return of deposits to Greek banks since Athens secured an extension to its financial rescue last month has eased pressure on the bank to act.
Reuters
