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TheStreet Open House

Draghi: ABS Buys to Have 'Sizeable' Balance Sheet Impact

FRANKFURT (MNI) - European Central Bank President Mario Draghi said Thursday that quantitative easing was discussed during its September meeting when the Bank decided to begin purchasing asset backed securities and covered bonds as part of a new effort to stoke inflation amid the region's flagging recovery.

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Speaking during his regular monthly press conference in Frankfurt, during which the Governing Council decided to reduce the Bank's key interest rates to record lows, Draghi said the asset purchases would have a "sizeable impact" on the ECB's balance sheet.

"The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area no-financial private sector under and ABS purchase programme," Draghi said in his opening statement. "In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued buy MFI's domiciled in the euro area."

"These decisions will add to the range of monetary policy measures taken over recent months, he continued. "In particular, they will support our forward guidance on the key ECB interest rates and reflect the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies."

A precise assessment of the impact, Draghi said, was too complex at this time and would become clearer after the execution of the second leg of the ECB's planned Targeted Longer Term Refinancing Operations (TLTRO) programme in December.

Draghi said that while the decision to begin the purchase programme wasn't unanimous, it was nonetheless made with what he called a "comfortable majority".

During his question-and-answer session with the media following the rate decision, Draghi insisted that this did not mean there was no further unanimity on the Governing Council with respect to further use of nonstandard monetary policy tools.

"The unanimity and agreement is not a blank cheque -- no matter what we are going to do we are going to be unanimous. We are unanimous in the intent but when the time comes to decide exactly what measures we should undertake there could be differences of views," he explained, noting that today's "comfortable majority" wasn't a contradiction of his earlier statement on unanimity.

He also said that, while inflation expectations remain anchored, the Council had seen "the downside risk increasing of recent and that explains why we have decided to strengthen the measures decided in June and compliment these measures with others."

The ECB had lowered its Eurozone growth and inflation forecasts for this yea, along with GDP forecasts for 2015, owing to the weakening economic and price dynamics. He also said that inflation rates would stay at low levels over the coming months before starting to accelerate again in 2015.

The ECB's September Staff Forecasts call for inflation of 0.6% this year, down from a June projection of 0.7%. The Bank also sees inflation of 1.1% and 1.6% in 2015 and 2016 respectively, forecasts that are inline with those released in June.

On growth, the ECB lowered its 2014 and 2015 estimates to 0.9% and 1.6% respectively (from 1.0% and 1.7%) but raised its 2016 estimate to 1.9% from 1.8%.

"The Staff Projections foresee a return of inflation on an upward trend because essentially of the recovery, of the exchange rate, of the effects of our monetary policy, the prospects for global demand," Draghi said. "They also see an increase in the price of food, the usual assumptions are behind us. The downward trend we see we think is a temporary deviation from a base line which we will see inflation expectations going back toward 2% but not at 2% in 2016."

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