ECB's Draghi: government bond purchases possible

AP News
Posted: Nov 17, 2014 12:48 PM
ECB's Draghi: government bond purchases possible

LONDON (AP) — The European Central Bank stands ready to buy government bonds if inflation in the 18-country eurozone fails to rise as anticipated, its president said Monday in a hint that helped shore up the region's stock markets and put pressure on the euro.

Addressing lawmakers of the European Parliament, Mario Draghi said the bank's governing council remains unanimous in its commitment to using additional unconventional instruments within its mandate.

"Other unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds," Draghi said.

The ECB tries to keep inflation across the 18-country eurozone at just below 2 percent. In the year to October, inflation stood at only 0.4 percent. Draghi said the bank continues to expect inflation will remain at current levels for a few more months but that it will start rising again next year.

Though the ECB has cut interest rates to record lows and backed the purchase of some types of private-sector bonds, it has refrained from following other central banks such as the U.S. Federal Reserve and the Bank of England in buying government bonds — so-called quantitative easing, or QE.

Proponents of QE say the policy can help shore up the recovery by reducing borrowing costs for businesses, households and governments. But Germany, Europe's most powerful economy, has voiced concerns about such a program, worried it would amount to throwing money at profligate states.

Success is not guaranteed, as evidenced by Japan's return to recession in the third quarter even though the country's central bank is enacting its own bond purchase program.

Most experts think the ECB is unlikely to back large-scale government bond purchases at its next meeting in December but that it remains a possibility early next year if the economy fails to pick up or inflation turns to deflation. A sustained drop in prices can choke economic activity if consumers put off purchases in the hope of bargains down the line.

Stocks were buoyed by Draghi's comments — a QE program would create new money that often ends up in financial markets. Germany's DAX and France's CAC-40 stock indexes both recovered from losses to close 0.6 percent higher.

"All traders have to do is look to Japan; QE is a sure way to set a fire under the stock market but there is no guarantee that it will work," said David Madden, market analyst at IG.

The euro was also pressured by Draghi's comments, trading 0.6 percent lower at $1.2455. The prospect of more money in the system tends to weaken a currency.

Draghi said monetary policy alone can only do so much and once again urged governments across Europe to pursue structural reforms to help bring down unemployment and lift growth.

He singled out Greece as a country that is seeing benefits "accruing" from its wide-ranging economic reforms. Greece grew by a quarterly rate of 0.7 percent in the third quarter. That made Greece, which has contracted every year since 2008, the fastest-growing eurozone economy in the quarter.

"2015 needs to be the year when all actors in the euro area, governments and European institutions alike, will deploy a consistent common strategy to bring our economies back on track," Draghi said.