ECB ready to start printing money next week | WHAT REALLY HAPPENED

ECB ready to start printing money next week

E.C.B. to Begin Bond-Buying Program on Monday

Bond buying is a way for the European Central Bank to effectively print money and inject it into the economy. But confidence in the central bank’s ability to rekindle inflation could suffer if the market is so tight that it is unable to meet its goal of buying €60 billion of debt a month.

NICOSIA, Cyprus — The European Central Bank will begin its big new stimulus program on Monday, the bank’s president, Mario Draghi, said, as he predicted improvements in the economy and in the eurozone’s inflation picture as a result of the effort.

The starting date, announced on Thursday, was one of many details the financial markets had been awaiting since the central bank announced in January that it would embark on a program of large-scale asset purchases — a so-called quantitative easing effort intended to fix the collapse in consumer prices.

At a news conference in Cyprus, which is still recovering from a severe banking crisis two years ago, Mr. Draghi appeared unruffled by recent political turmoil in the eurozone provoked by a change in government in Greece. Instead, he offered one of his most optimistic assessments in months of the eurozone economy — and gave the central bank much of the credit.

“Our monetary policy decisions have worked,” Mr. Draghi said at the news conference. “It’s with some certain degree of satisfaction that the governing council has acknowledged this.”

Underpinning his optimism, economists at the central bank on Thursday raised their forecast for growth this year to 1.5 percent, compared with a forecast in December of 1 percent. They increased their estimate for 2016 to 1.9 percent, up from a previous prediction of 1.5 percent.

Despite the more promising outlook, the staff projections indicated that the central bank would not approach its inflation target of below, but close to, 2 percent until 2017 at the earliest.

“The E.C.B.’s macroeconomic assessment was much more upbeat than in previous months,” Carsten Brzeski, an economist at ING Bank, said in a note to clients on Thursday. In fact, Mr. Brzeski added, “today’s euphoria was in our view almost a bit overdone.”

Mr. Draghi’s suddenly sunny forecast may have been calculated. The central bank’s policies will be more effective if investors, corporate executives and consumers believe in them. Supported by some genuinely positive economic data, like a dip in unemployment, Mr. Draghi appeared to be using the news conference to give a pep talk that would encourage more investment and spending.

Markets fluctuated during the briefing, but stocks and bonds eventually rallied. Blue-chip shares in the eurozone ended the day up about 1 percent, while yields on most eurozone governments’ bond fell slightly.

Indications that the central bank plans to stick with its policies, and maintain an environment of low interest rates, briefly sent the euro currency below $1.10 for the first time in a dozen years. At the end of the European trading day it was at $1.1012.

Because of low oil prices, inflation is expected to remain low — or even in negative territory — until later this year, the central bank said on Thursday. But it revised its inflation forecast for 2016 upward, to 1.5 percent, and its 2017 estimate to 1.8 percent.

The central bank, which was meeting in the capital city of Cyprus as part of its custom of convening twice a year away from its Frankfurt headquarters, left its benchmark rate at 0.05 percent. With inflation in negative territory, the central bank is expected to keep the main rate at close to zero indefinitely.
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The monetary policy meeting was the first since the central bank said on Jan. 22 that it would begin buying eurozone government bonds and other debt at a monthly rate of 60 billion euros, or about $67 billion, in an attempt to push inflation back toward the official target.

Greece, which is seeking new terms with the European Central Bank and other international creditors, was a main topic of discussion, in part because of a large contingent of Greek journalists. Mr. Draghi said that the central bank was willing to step up its assistance to Athens, “provided the conditions are in place.”

The caveat indicates that the new left-wing Greek government still has work to do to convince its lenders — which include the European Commission and the International Monetary Fund — that it is serious about making the economic changes its lenders are demanding in exchange for extending the country’s bailout program by at least four months.

The European Central Bank’s lending to Greece right now is 68 percent of the country’s gross domestic product — the highest in the eurozone — Mr. Draghi said. “In this sense, the E.C.B. is the central bank of Greece,” he added.

The European Central Bank will begin its big new stimulus program on Monday, Mario Draghi announced, and he predicted improvements in the economy and in the eurozone’s inflation picture.
Video by CNBC on Publish Date March 5, 2015. Photo by Katia Christodoulou/European Pressphoto Agency.

The central bank’s governing council on Thursday decided to raise its emergency lending to Greek commercial banks by €500 million, Mr. Draghi said.

And he indicated that the central bank would consider resuming its policy of letting the Greek banks use their government’s bonds as collateral to obtain regular loans from the European Central Bank — but only when Athens demonstrated its commitment to making the economic changes the international creditors were demanding.

Because Greek government bonds are rated below investment grade, the European Central Bank must grant a waiver to let the banks use them as collateral. The central bank decided in February to rescind its previous waiver, in light of the uncertainties surrounding the election of the new Greek government.

With a note of sarcasm in his voice, Mr. Draghi rebutted suggestions by some analysts that the European Central Bank would not be able to find enough debt to meet its bond-buying goals.

Demand for government bonds issued by Finland, Germany and some other countries is so strong that some of them have negative interest rates. In effect, investors are willing to pay some debtors to keep their money safe.

“Until a month ago, nobody had any doubts that public debt — sovereign debt — in the euro area was actually very, very big,” Mr. Draghi said. “Now some people worry we won’t have enough bonds.”

Mr. Draghi said that the European Central Bank would not buy bonds with yields below the interest rate the central bank pays on commercial bank deposits that it holds, which is currently a negative rate — minus 0.2 percent. That is approximately the negative rate at which German two-year bonds have been trading.

But the yields of 10-year bonds of eurozone countries all remain in positive territory.

Bond buying is a way for the European Central Bank to effectively print money and inject it into the economy. But confidence in the central bank’s ability to rekindle inflation could suffer if the market is so tight that it is unable to meet its goal of buying €60 billion of debt a month.
Continue reading the main story
Continue reading the main story

The policy might already have had a beneficial effect. Market interest rates have been falling in anticipation of the bond-buying campaign. That is making it possible for companies to borrow money more cheaply than ever. What companies save on interest payments they can invest in expansion and hiring.

“We are investing a lot right now,” Hakan Samuelsson, the chief executive of Volvo Car Group, said in an interview at the Geneva International Motor Show on Tuesday. “It’s an advantage that we have low interest rates.”

Sweden, where Volvo is based, is not a member of the eurozone, but it closely tracks its monetary policy with that of the currency bloc, and the Swedish benchmark rate is below zero. Volvo’s decision to renew its model line and rebuild market share in the United States was not prompted by low interest rates, Mr. Samuelsson said.

“But,” he added, “it’s good timing for us.”

Mr. Draghi on Thursday rejected criticism that monetary policy was helping only high income people who own stocks and bonds. The benefits, he said “are being passed in the form of lower borrowing costs in the real economy.”

The choice of Cyprus for the central bank meeting was noteworthy because the country continues to suffer from the effects of the collapse of its banks in 2013, and from a rescue plan that forced depositors to shoulder some of its cost.

Many Cypriots are bitter toward the European Central Bank, which they accuse of making the country’s problems worse by continuing to keep the banks on life support long after it was clear that they were insolvent. The delay raised the cost of the bank collapse and exacerbated the economic pain in Cyprus, critics say. Unemployment is 16.1 percent, and residents still face restrictions on transferring money out of the country.

Some residents of Cyprus expressed their dissatisfaction with the central bank’s behavior by staging demonstrations on Wednesday and Thursday outside the conference center where Mr. Draghi held the news conference.