The European Central Bank has adjusted downwards economic forecasts for this year and next as it cut interest rates to record lows and announced plans to buy asset-backed securities and covered bonds to stimulate the economy.
Stock markets responded positively to the ECB actions, with the benchmark StoxxEurope 600 index rising to a two-month high.
But the euro fell to its lowest level in over a year – in the currency’s largest one-day decline since late 2011 at the height of the euro zone crisis – after what amounts to the European Central Bank’s last resort short of full-scale quantitative easing.
In updated staff projections released after the division of the governing council was announced, the bank said it now expects euro zone GDP to expand by 0.9 per cent this year, compared with 1 per cent forecast three months ago.
It also downgraded its forecast for next year, with GDP predicted to expand by 1.6 per cent in 2015 compared to the figure of 1.7 per cent predicted in June.
While the bank is predicting an inflation rate of 0.6 per cent for this year, compared to 0.7 per cent previously, the inflation outlook for next year is unchanged at 1.1 per cent.
Earlier, ECB president Mario Draghi confirmed that the bond buying programme would apply to residential mortgage backed securities, raising hopes that Irish banks, that are harbouring a high number of mortgage loans on their books could benefit from the scheme, which is expected to begin next month. While further details will be announced after next month’s governing council meeting, Mr Draghi said the ECB would purchase “a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector.”
In his press conference following the monthly meeting Mr Draghi said the ECB would purchase less risky senior tranches of securitised debts and loans, as well as mezzanine tranches with guarantees. Securities backed by residential mortgage loans, as well as those backed by SME loans, will be included in the exercise.
With some estimates putting the total value of the programme over three years at up to €500 billion, other analysts were less sanguine. Daiwa Capital Markets said the asset-backed securities programme might only equate to little over €10 billion.
Mr Draghi confirmed last month that the bank had engaged Blackrock to work on the programme, which was originally mooted in June.
He reiterated “the overall subdued outlook for inflation” as he announced a surprise cut in the refinancing rate to 0.05 per cent, and a 10 basis point reduction in the deposit rate to -0.2 per cent.
While insisting that the interest rate cut meant that the “lower bound” of interest rates had been reached, some analysts questioned whether the ECB was now contradicting its own forward guidance, after Mr Draghi had indicated in June that the lower range had been reached. – (Additional reporting, Financial Times)