ECB announces trillion-euro bond purchase programme

23 Jan 2015

The European Central Bank (ECB) on Thursday announced an expanded bond-buying programme to pump hundreds of billions of euros into sagging euro zone economies.

The new bond purchase programme will run parallel to its existing private sector asset purchase programmes aimed at addressing the risks of a too prolonged period of low inflation.

ECB said the expanded purchases, which would include bonds issued by euro area central governments, agencies and European institutions, will average €60 billion ($68 billion) a month.

The purchase of sovereign debt, which would start in March this year, will extend till September 2016, taking the fresh bond purchases to over a trillion euros.

ECB said the governing council took the decision to expand bond purchases after actual and expected inflation in the euro area had drifted towards their historical lows.

''As potential second-round effects on wage and price-setting threatened to adversely affect medium-term price developments, this situation required a forceful monetary policy response,'' ECB said.

The ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy. In both cases, this will contribute to an easing of financial conditions.

Euro zone interest rates are already at lower end and a further easing of monetary and financial conditions would make access to finance cheaper for firms and households and support investment and consumption, ultimately contributing to a return of inflation rates towards 2 per cent, ECB noted.

ECB said the bond-buying programme will continue until the governing council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2 per cent over the medium term.

ECB justified the quantitative expansion saying the instruments deployed under ''unprecedented economic and financial environment'' are appropriate in the current circumstances and in full compliance with the EU treaties.

As regards the additional asset purchases, the Governing Council retains control over all the design features of the programme and the ECB will coordinate the purchases, thereby safeguarding the singleness of the Euro system's monetary policy. The Euro system will make use of decentralised implementation to mobilise its resources.

On the sharing of hypothetical losses in the bond purchases, ECB said that purchases of securities of European institutions (which will be 12 per cent of the additional asset purchases, and which will be purchased by individual central banks) will be subject to loss sharing.

The rest of the central banks' additional asset purchases will not be subject to loss sharing.

The ECB will hold 8 per cent of the additional asset purchases. This implies that 20 per cent of the additional asset purchases will be subject to a regime of risk sharing.

The euro fell more than two US cents to $1.14108 on the announcement, and European shares hit seven-year highs.

The ECB action has prompted the Swiss central bank to abandon its cap on the franc against the euro. Denmark cut its main policy interest rate on Thursday for the second time this week after the ECB announcement, aiming to defend the Danish crown's peg to the euro.

Reports, meanwhile, quoted an unnamed euro zone central banking source as saying that five euro zone central bank chiefs, including those of Germany, the Netherlands, Austria and Estonia, along with executive board member Sabine Lautenschlaeger, are opposed to the expanded asset-purchase plan.

They doubt whether the ECB's bid to push euro zone annual inflation back up to its target of just below two per cent will help avert a Japanese-style deflationary spiral.