Oliver Q
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ECB Keeps Rates on Hold as Focus Shifts to Asset Buying

The European Central Bank kept interest rates unchanged at record lows as investors wait for President Mario Draghi to reveal details of a plan to buy assets.

The 24-member Governing Council left the main refinancing rate at 0.05 percent at its meeting today in Naples, Italy. The decision was predicted by all 60 economists in a Bloomberg News survey. The deposit rate and the marginal lending rate remained at minus 0.2 percent and 0.3 percent, respectively.

The focus now shifts to Draghi’s press conference at 2:30 p.m., when he is due to unveil the specifics of a plan to buy asset-backed securities and covered bonds. Greek debt climbed yesterday on speculation the ECB will reduce the requirements on the quality of assets it can accept.

ECB's Options to Aid the Economy

“We want to know what, how much, from whom, and when the ECB plans to buy,” said Robert Kuenzel, an economist at Daiwa Capital Markets Europe Ltd. in London. “Standards may have to be revised for the program to be effective and equitable.”

A proposal by the ECB’s six-person Executive Board foresaw that existing requirements on the quality of assets accepted are relaxed to allow purchases of some Greek and Cypriot ABS, the Financial Times reported this week, citing unidentified people familiar with the matter. An ECB spokesman declined to comment on the article.

Photographer: Martin Leissl/Bloomberg

European Central Bank President Mario Draghi has said he wants to steer the central... Read More

Peripheral Debt

Bonds backed by mortgages to Greek civil servants rallied yesterday to the highest since the nation requested its first bailout in 2010.

The ECB’s asset-buying plan is part of a range of stimulus measures it has announced since June to fight the threat of falling prices in the 18-nation currency bloc. Inflation (ECCPEST) slowed to 0.3 percent last month, the least in almost five years, and the central bank’s preferred measure of medium-term inflation expectations has extended its decline.

While Draghi pledged to start the program this month, initial purchases will probably be modest, according to two euro-zone central bank officials who asked not to be identified because the matter is private.

The ECB president said last month that it’s “very difficult to assess the size” of purchases. One challenge is building the logistical operation to make the purchases.

Balance Sheet

An early proposal last month foresaw the ECB outsourcing purchases to external asset managers, with national central banks buying shares in a fund, according to two officials familiar with the proposal. Policy makers rejected the draft and decided that purchases would be made by the ECB, on the recommendation of outside advisers, and held on its balance sheet, the officials said.

The ECB is seeking tenders for cash-flow modeling and market prices data, as well as calculations on the likelihood for losses, on asset-backed securities and covered bonds, according to a notice on its website. The contracts are envisaged to start in November and last four years, the document shows.

Draghi has said he wants to steer the central bank’s balance sheet back to the levels seen at the start of 2012, signaling as much as 1 trillion euros ($1.3 trillion) in assets could be added. His plan got off to a weak start last month, when a four-year funding program tied to the size of banks’ loan books attracted subdued demand.

QE Option

We “remain unconvinced that these measures will be sufficient to turn the downward trend in inflation expectations,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “Draghi will thus need to maintain a very dovish message, promising further action if needed.”

Should the plan fail to boost the outlook for consumer prices, Draghi may have to step up to large-scale buying of government debt. That threatens to widen a rift in the Governing Council, where Germany’s Jens Weidmann has already opposed the ABS plan.

“The ECB’s credibility is at stake so it cannot afford to allow inflation and inflation expectations to undershoot the target for too much longer,” said Andrew Bosomworth, a Munich-based portfolio manager at Pacific Investment Management Co. “I favor elevating QE to the central policy tool.”