ECB to start quantitative easing as it raises growth forecast

The European Central Bank will launch into quantitative easing next week having increased its economic growth forecasts for this year and next.

President Mario Draghi said the first bond purchases with new money would take place on March 9.

The eurozone’s central bank has said it will buy €60bn a month until September 2016 or until inflation is pushed backed towards a target of close to but below 2%.

The ECB, which left interest rates on hold at record lows just above zero at its meeting off-base in Cyprus yesterday, lifted its growth forecast to 1.5% for this year, from the 1.0% it predicted in December.

For 2016, growth of 1.9% is now expected, up from a previous 1.5%.

“The latest economic data, and particularly survey evidence available up to February, point to some further improvements in economic activity at the beginning of this year,” Draghi told a news conference.

“Looking ahead, we expect the economic recovery to broaden and strengthen gradually.”

An analysis of Reuters polls shows more than half the most important economic data reports from the eurozone since the start of the year have beaten the consensus forecast and many have topped the highest prediction.

Germany, Europe’s largest economy, has led the way.

Inflation, now running at -0.3%, is forecast at zero this year rising to 1.8% in 2017. That is sufficiently close to the ECB’s target to suggest money printing will not run beyond September 2016.

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 2% and half think the purchases will be extended.

There are tentative signs inflation has bottomed out.

The February reading of -0.3% 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 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,” Mr Draghi said.

The ECB is keen to stay out of the political debate over Greece’s future and Mr Draghi signalled the ECB would not allow a plea from Athens to be allowed to issue more short-term debt to get it over acute 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 programme has driven eurozone borrowing costs down to the point where Spain can borrow for 10 years at under 1.3% 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. Mr Draghi said it would only steer clear of bonds yielding less than the ECB’s -0.2% deposit rate.



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