Draghi set to unveil securities purchase plan

ECB president Mario Draghi will announce an asset-backed securities purchasing programme at Thursday’s monthly meeting instead of unveiling plans for fully fledged quantitative easing.

The latest inflation figures, which show the average rate across the eurozone has dropped to 0.3%, has prompted fears that the region could slip into a deflationary spiral.

Moreover, the unemployment rate is stuck at 11.5% and the bloc’s largest economy is facing huge headwinds following the escalation in tensions between Ukraine and Russia.

The deteriorating economic backdrop has raised expectations that Draghi will unleash quantitative easing in an attempt to stave off deflation and stoke economic activity.

However, Lorcan Roche Kelly, head of Agenda Research, says quantitative easing would have a limited effect on the broader economy because sovereign bond yields are already at historical lows.

Because of Draghi’s speech at the Jackson Hole gathering of central bankers and his repeated assertions that he will do something, it is likely he will announce plans for a broad-based ABS programme.

There had been speculation last year that the ECB was looking for the European Investment Bank to act as a guarantor for an ABS programme, but the Luxembourg-based bank declined because it would affect its AAA credit rating.

However, with inflation at 0.3%, Draghi has to do something, said Mr Roche Kelly. Together with the targeted long-term refinancing operations announced in June, it will take about 18 months for the benefits to filter through to the real economy, he said.

Under an asset backed securities programme, the ECB would commit to purchasing large volumes of SME loans sold by banks, thereby freeing up lending to businesses.

Frankfurt-based econom-ist with ING bank, Carsten Brzeski, also believes that quantitative easing is highly unlikely on Thursday. “First, it would make obsolete the outright monetary transactions and principle of conditionality. Second, it is hard to see what difference a further drop in yields would make. Third, why would the ECB decide on new measures when the last one (targeted long-term refinancing operations) has not started yet? Last, at least for some ECB members, indirect government financing remains a red line that will be very hard to cross.”