5 Min Read
NICOSIA/FRANKFURT (Reuters) - The European Central Bank said it will start printing money to buy bonds next Monday and delivered a robust economic outlook that will make it hard to extend the plan beyond its envisaged Sept. 2016 end-date.
The ECB is embarking on the program of quantitative easing (QE) with a view to raising euro zone inflation from below zero back toward its goal of just under 2 percent, and to helping buoy economies across the 19-country bloc.
The ECB, which left interest rates on hold at record lows just above zero at its meeting off-base in Cyprus on Thursday, lifted its growth forecast to 1.5 percent for this year, from the 1.0 percent it predicted in December.
ECB staff foresaw euro zone inflation rising from 0 percent this year to 1.8 percent in 2017, which would put it in line with the bank's target of close to but below 2 percent.
"If these very bullish forecasts are met, there certainly won't be more QE after September 2016," said Berenberg bank economist Christian Schulz. "In fact, they might then start discussing normalizing policy rates at some point."
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.
There are tentative signs that inflation, now running at -0.3 percent, has bottomed out.
The February reading was above forecasts, oil prices have rebounded from January lows, growth is picking up and the euro hit an 11-year low against the dollar on Thursday, boosting prospects for higher imported inflation.
"The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices," Draghi said, firming up his language from the ECB's Jan. 22 meeting.
The ECB is keen to stay out of the political debate over Greece's future, and Draghi signaled the ECB would not heed a plea from Athens that it be allowed to issue more short-term debt to solve short-term funding problems.
But he said the ECB had raised the amount of Emergency Lending Assistance (ELA) that the Greek central bank could provide to its banks.
Anticipation of the QE program has driven euro zone borrowing costs down to the point where Spain can borrow for 10 years at under 1.3 percent 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.
Some analysts have suggested the ECB would distort the bond market by buying bonds with negative yields. Draghi said it would only steer clear of bonds with yields below the ECB's -0.2 percent deposit rate.
"There's already speculation in the market that they may be forced to cut their own deposit rate if yields fall below -0.2 percent," said Danske Banks economist Pernille Bomholdt Nielsen.
"Then it would be like a dog chasing its own tale. We don’t think it will happen, but certainly there will be pressure on them to cut," she added.
Under the plan, the euro zone's national central banks will focus exclusively on buying on their domestic bond market - a move aimed at assuaging the concerns of Germans worried that pooling risks could leave them to foot the bill for any losses.
Another concern is whether the ECB will find enough bonds to buy. The market is flush with uninvested cash while banks are under obligation to hold top-tier assets, like government debt.
"There may be complexities. We think they are not relevant," Draghi said, noting that more than half of euro zone sovereign bonds were held outside the currency area.
Draghi said the ball was now in the court of euro zone governments, who must contribute "decisively" to economic recovery with structural economic reforms.
In a pointed remark aimed at France, which last week won two extra years to bring its deficit under the EU limit, Draghi called for Europe's budget rules to be respected.
"Full and consistent implementation of the Stability and Growth Pact is key for confidence in our fiscal framework," he said.
Additional reporting by Michele Kambas in Nicosia and Paul Carrel in Frankfurt. Writing by Mike Peacock. Editing by Jeremy Gaunt