To our, as well as the market’s, surprise, ECB President Mario Draghi announced that the ECB would start purchasing asset-backed securities and covered bonds in October. The act aims to increase liquidity to the financial system and stimulate growth. The ECB announced to cut the main refi rate by -10 bps to 0.15%. Correspondingly, it also lowered the bank overnight deposit rate to -0.2% and the marginal lending rate to 0.3%. The euro slumped against the Us dollar and the pound as the so-called QE is eventually embarked.
In the policy statement, the ECB unveiled the ABS purchases plan, noting its role in “facilitating new credit flows to the economy”. The portfolio would contain “a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector”. At the same time, it would also embark a new covered bond purchase program (CBPP3), buying “a broad portfolio of euro-denominated covered bonds issued by MFIs” domiciled in the Eurozone. The purchases of both programs would begin next month while the details would be unveiled after the October ECB meeting.
Reuters cited that the programs (purchases of ABS and covered bonds) worth up to 500B euro and would have a duration of 3 years. While the ABS purchases program might not be as effective as the Fed’s QE which involved purchases of treasury bonds and mortgage-backed securities, it indicates that ECB’s commitment to take various actions to boost growth and combat deflation.
However, President Draghi indicated previously that measures by the central bank alone would not help economic recovery. Draghi called for actions on “both sides of the economy”, suggesting deepening of fiscal coordination and speeding up structural reforms, in accompaniment with accommodative monetary policy.