Mario Draghi says he won’t sit back and wait for stimulus to reach the economy.
The European Central Bank president said a planned asset-purchase program shows that policy makers will steer the size of the institution’s balance sheet to avert deflation. In comments in Brussels yesterday, he underlined the need for that approach to revive the 18-nation economy.
The ECB is moving to a more “active and controlled management of our balance sheet,” Draghi said in his quarterly testimony to European lawmakers. “Unacceptably high unemployment and continued weak credit growth are likely to curb the strength of the recovery. The risks surrounding the expected expansion are clearly on the downside.”
Even after cutting borrowing costs for banks to record lows and offering long-term loans, Draghi is struggling to persuade them to take more ECB cash to finance lending to the real economy. In contrast to other major central banks, the ECB’s assets have shrunk by a third since 2012.
Policy makers “are determined to take back control,” said Richard Barwell, senior economist at Royal Bank of Scotland Group Plc in London. “Draghi seems convinced of the case for a major purchase program. I think he is rather less concerned about the questions of what they buy and whether they call it quantitative easing or credit easing; he’s more focused on how much they buy.”
Economic growth in the euro area came to a halt in the second quarter and Draghi said yesterday that recent indicators have given no indication that the “sharp decline” in economic activity in the region has stopped. Purchasing managers indexes by Markit Economics to be published today will probably show manufacturing and services activity failed to accelerate this month, according to Bloomberg surveys of economists.
The ECB currently has a policy of meeting all banks’ demands for liquidity, meaning that lenders determine how much central-bank cash they take. Draghi reiterated yesterday that he intends to expand the balance sheet to the levels seen at the start of 2012, signaling an addition of as much as 1 trillion euros ($1.3 trillion) in assets.
An offer of four-year loans last week showed how challenging that may be, as banks borrowed a less-than-estimated 82.6 billion euros. Draghi said yesterday that the take-up was within ECB expectations and the success of the program can only be measured after the next offer in December.
A more proactive way of injecting funds would be the program to buy asset-backed securities and covered bonds, details of which are scheduled to be unveiled next month. The ECB president has so far left open the option of large-scale sovereign-bond purchases, or quantitative easing.
“Outright purchases will increase the size of the ECB’s balance sheet, but the additional risk exposure will be limited,” he said. “We stand ready to use additional unconventional instruments within our mandate, and alter the size and/or the composition of our unconventional interventions should it become necessary.”
Figures last week showed that euro-area inflation held at 0.4 percent in August, the weakest pace in almost five years. That compares with the ECB’s goal of just below 2 percent. Draghi said the Governing Council remains “fully determined” to counter risks to the medium-term outlook for inflation.
“The bottom line is that the ECB is starting to buy assets outright,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “This marks a discontinuity in policy.”