European Central Bank plans bond buying spree to boost investment

European Central Bank president Mario Draghi says bond purchases will begin later this month.

The European Central Bank (ECB) has said that it plans to start buying bonds in the middle of the month, but it wants to wait and gauge the success of existing plans before rolling out further stimulus.

A two-year programme is due to get underway from mid-October that will see the central bank purchase covered bonds and asset-backed securities. It is going to take an inclusive approach to the scheme – it will buy asset backed securities that are below investment grade (to BBB-), CityAM reports, to ensure that Greek and Cypriot banks can also get involved.

ECB already has around €700 billion in asset-backed securities on its €2 trillion balance sheet, and that figure is soon to rocket substantially.

But it’s a price that ECB president Mario Draghi is willing to pay if it means kick-starting growth across the eurozone.

Buying up banks’ debt is intended to free up their balance sheets so they can lend to businesses, triggering a rise in investment to get the eurozone going again. Mr Draghi says that inflation is a top priority, with intentions to push price growth back up to the ECB’s two per cent target.

As it is, Mr Draghi has kept using all the unconventional tools available to keep offering fresh stimulus for Europe. But it appears the ECB is running out of cards to play, and analysts are becoming more certain that eventually, the ECB will announce a monetary easing programme.

That would be likely to ruffle feathers in some economies – especially Germany, which has weathered the economic storm best in the eurozone and which has been critical of the ECB’s accommodative stance in the past.

If it does happen, easing could still be some time away. Mr Draghi has made clear that for now he wants to wait and evaluate the impact of the measures that have already been brought in.

In June the ECB introduced a raft of new stimulus mechanisms, and it has also cut interest rates twice since then.

The eurozone has needed a shot in the arm for some time. If the reforms announced in June don’t turn out to fulfil that purpose, something else will be needed.